Is Critical Illness Insurance payout taxable when H&R Block says it isn't?

This is a great question that confuses a lot of people. The taxability of critical illness insurance payouts depends entirely on how the premiums were paid. If you paid the premiums with after-tax dollars, then the benefits are generally tax-free. However, since you paid with pre-tax dollars through your employer, you're correct that the IRS typically considers the benefits taxable income. The logic is that you received a tax advantage when paying the premiums, so the benefits are taxable when received. The exception would be if you used the payout for qualified medical expenses, but even then, only the portion used for those expenses might be exempt. The rest would typically be considered taxable income that needs to be reported. I'd suggest asking your H&R Block representative to explain their reasoning in writing, referencing the specific IRS code they're basing their conclusion on. You might also want to get a second opinion from a different tax professional who specializes in insurance payouts.

After dealing with something similar last year, I found https://taxr.ai super helpful for this exact situation. I was getting totally different answers from two different tax preparers about my critical illness payout (mine was through my union plan). I uploaded my insurance policy documents and benefit statements to taxr.ai and it analyzed everything and showed me exactly what portion was taxable and why. The tool even showed me the specific IRS publications and tax code sections that applied to my situation. For what it's worth, in my case, since I paid premiums with pre-tax dollars, the payout WAS taxable income, minus the medical expenses I could document. The analysis explained that if you get a tax benefit when paying premiums, you can't also get a tax-free benefit when receiving the payout.

I followed the advice from Profile 12 and tried taxr.ai for my situation with my disability insurance payout. Just wanted to share that it worked really well! The tool showed me that in my mixed premium payment situation (some pretax, some post-tax), I needed to calculate the taxable portion proportionally based on how much of the premiums were paid pre-tax. In your case with the critical illness insurance paid entirely with pretax dollars, the analysis would likely confirm what the first commenter said - that the payout is indeed taxable income. The tool cited IRS Publication 525 which specifically addresses employer-paid health and accident insurance. H&R Block is probably giving you incorrect information. Saved me hours of research and potentially an audit later! I'm going into my accountant appointment tomorrow with actual documentation to back up my position.

I had a similar issue last year trying to get straight answers from the IRS about my critical illness payout. After spending WEEKS trying to get through to someone who could actually help (kept getting transferred or disconnected), I found https://claimyr.com and used their service to get through to an actual IRS agent who could give me a definitive answer. You can see how it works here: https://youtu.be/_kiP6q8DX5c It was such a relief to finally speak to someone who could check my specific situation and confirm that yes, my critical illness payout from an employer-sponsored pre-tax premium plan WAS taxable income. The agent explained exactly how to report it and what forms I needed. Getting that direct confirmation from the IRS gave me the confidence to push back when my tax preparer initially tried to exclude it from my return. Might be worth doing the same in your case since H&R Block seems to be giving you questionable advice.

I need to eat my words from my skeptical comment. After my frustration boiled over, I tried the Claimyr service mentioned above out of desperation. I honestly didn't expect much, but I'm shocked to report it actually worked. After months of trying to get through about my audit situation, I was connected to an IRS agent within a couple hours of starting the service. The agent was able to pull up my file and explained exactly what documentation they needed to resolve my case. She even gave me a direct fax number to send the materials to expedite the process. So to the original poster - I'd strongly suggest getting official clarification from the IRS about your critical illness payout taxation. The peace of mind from hearing it directly from the source is worth it, especially when there's potentially $47,000 of income at stake. My experience with H&R Block has been that they often take the path of least resistance rather than digging into complex situations.

I work in benefits administration (not a tax pro) and see this confusion all the time. Here's the general rule: if you never paid taxes on the money that funded the premiums, you'll pay taxes on the benefits. If you already paid taxes on the money that funded the premiums, the benefits are tax-free. In your case, since you used pre-tax dollars from your paycheck, those premium payments reduced your taxable income at the time. The government wants their piece eventually, so they take it on the back end when you receive benefits. H&R Block might be confusing critical illness insurance with health insurance reimbursements, which work differently. Or maybe they're thinking of a policy where premiums are paid with after-tax dollars? Either way, they're giving you risky advice.

My cousin is an enrolled agent and says most tax preparers at chain places like H&R Block don't understand these specialized situations. They mostly deal with simple W-2 income and standard deductions. I had a similar situation with a long-term disability policy and the H&R Block person insisted the benefits were tax-free even though my premiums were employer-paid with pre-tax dollars. I ended up going to a CPA who specialized in insurance matters who confirmed it was definitely taxable and showed me the specific tax code sections. Don't risk an audit! The IRS computers will likely catch this eventually when they match up the 1099 from the insurance company with your return. The penalties and interest could be substantial on $47k of unreported income.

The lack of a 1099 form doesn't mean the payout isn't taxable - it just means the insurance company might not be required to issue one for critical illness benefits. Many insurance companies don't automatically send 1099s for these payments because the taxability depends on how the premiums were paid, which they may not track. However, you're still legally required to report taxable income even without receiving a form. The IRS expects taxpayers to report all income, regardless of whether they receive documentation from the payer. Given that you paid premiums with pre-tax dollars, I'd strongly recommend getting a second opinion from a tax professional who specializes in insurance taxation rather than relying on H&R Block's advice. The potential consequences of underreporting $47,000 in income are severe - we're talking about penalties, interest, and possible audit scrutiny that could extend to other years. You might also want to request documentation from your employer's benefits department showing exactly how the premiums were handled payroll-wise. This will be crucial evidence if the IRS ever questions the tax treatment.

I'm dealing with almost the exact same situation right now! Got a critical illness payout of about $32k last year from my employer's plan where I paid premiums through payroll deduction (pre-tax). My tax preparer at Jackson Hewitt initially told me the same thing as your H&R Block person - that it was completely tax-free. After reading through all these responses, I'm definitely getting a second opinion. The logic about "if you got a tax break on the premiums, you pay tax on the benefits" makes total sense. I never thought about it that way, but it's basically the same principle as traditional 401k contributions vs. distributions. I'm going to take the advice here and get documentation from my HR department about how exactly the premiums were handled. Better to be safe than sorry, especially since the IRS has been ramping up audits lately. The peace of mind from getting it right the first time is worth way more than the extra taxes I might owe. Thanks everyone for sharing your experiences - this thread has been incredibly helpful in understanding what I need to do next.

I'm a tax preparer with 15+ years of experience, and I have to echo what most people here are saying - H&R Block is giving you incorrect advice. When premiums for critical illness insurance are paid with pre-tax dollars through an employer plan, the benefits are generally taxable income to the recipient. The key principle is simple: you can't get a tax benefit twice. Since you already received a tax advantage when the premiums were deducted from your gross pay (reducing your taxable income), the IRS expects to collect taxes when you receive the benefit payout. There are limited exceptions - primarily if the payout is used to reimburse qualified medical expenses that you haven't already deducted or been reimbursed for elsewhere. But even then, only that specific portion would be exempt from taxation. For a $47,000 payout, you're potentially looking at significant tax liability that H&R Block is incorrectly telling you to ignore. I'd strongly recommend getting a second opinion from a CPA or enrolled agent who has experience with employer-sponsored insurance benefits. Don't risk an audit and penalties over bad advice from a chain tax service. Document everything - your premium payment method, any medical expenses you paid out of pocket, and get written justification from H&R Block for their position if they continue to insist the payout is tax-free. You'll need this paper trail if the IRS comes asking questions later.

I went through this exact situation two years ago with a $38,000 critical illness payout from my employer's plan. Like you, I paid premiums with pre-tax dollars, and my initial tax preparer (also at H&R Block, coincidentally) told me the entire payout was tax-free. Something didn't sit right with me, so I did my own research and discovered what everyone here is confirming - when you pay premiums with pre-tax dollars, the benefits are typically taxable income. I ended up switching to a CPA who specialized in employee benefits taxation, and she confirmed that I owed taxes on the full amount. The frustrating part was that H&R Block never asked me HOW the premiums were paid - they just assumed it was tax-free because it was "insurance." That's a dangerous assumption that could have cost me thousands in penalties and interest if the IRS had caught it later. My advice: get everything in writing from H&R Block explaining their reasoning, then take that to a second tax professional for review. Don't let them file your return until you're 100% confident in the tax treatment. The IRS doesn't care what H&R Block told you - you're ultimately responsible for accurate reporting on your return. For what it's worth, even after paying taxes on my payout, I was still grateful to have had the critical illness coverage. But I definitely learned to be more skeptical of chain tax services when dealing with complex situations like employer-sponsored insurance benefits.

I'm a tax attorney who specializes in employee benefits, and I need to strongly reinforce what the experienced tax preparer said earlier - H&R Block is absolutely giving you incorrect advice that could result in serious consequences. The tax treatment of critical illness insurance benefits is governed by IRC Section 104(a)(3) and related regulations. When premiums are paid with pre-tax employer dollars (or employee pre-tax payroll deductions), the benefits are taxable income under Section 61. This is settled law, not a gray area. H&R Block's mistake likely stems from confusing critical illness insurance with health insurance reimbursements (which are generally tax-free) or with policies where premiums are paid with after-tax dollars. But the source of premium payments is absolutely critical for determining taxability. Here's what you need to do immediately: 1. Request written documentation from H&R Block citing the specific tax code sections supporting their position 2. Get your employer's benefits department to provide written confirmation of how premiums were handled (pre-tax vs. after-tax) 3. Consider consulting with a CPA or tax attorney who has experience with employer-sponsored insurance benefits The IRS has been increasingly focused on unreported income from insurance payouts. With a $47,000 benefit, you're looking at potential tax liability in the range of $10,000-15,000 depending on your bracket, plus penalties and interest if caught later. Don't risk it based on questionable advice from a chain tax service. If you need definitive guidance, consider requesting a private letter ruling from the IRS for your specific situation, though this may be overkill given how clear the law is on pre-tax premium situations.