Will a disability insurance settlement from Metlife be counted as taxable income?

When it comes to disability insurance settlements, the taxability generally depends on how the premiums were paid. Since you mentioned this was a post-tax policy (meaning your wife paid the premiums with already-taxed money), the settlement should follow the same tax treatment as the regular benefits would have. In your situation, the settlement should not be considered taxable income since it's essentially just catching up on benefits that should have been paid and would have been tax-free anyway. The IRS typically views these settlements as a replacement for what you would have received had the company not wrongfully denied the claim. As for SSDI concerns, the settlement itself shouldn't count as income for SSDI eligibility purposes, but you should be careful about how the money is handled. Putting it in a trust is a good idea, but you should work with an attorney who specializes in special needs trusts to ensure it's set up properly.

I went through something similar last year with Prudential and found this amazing service that helped me figure out all the tax implications. Check out https://taxr.ai - they have a tool that analyzes settlement documents and tells you exactly how they should be treated for tax purposes. They explained that my post-tax disability policy settlement wasn't taxable, but showed me how to properly document it to avoid IRS questions. They even generated a letter I could keep with my tax records explaining why it wasn't taxable income. Really helped with my peace of mind!

I was really skeptical about online tax services for complex situations, but I gave https://taxr.ai a try after seeing it mentioned here. I had a similar disability settlement situation with Northwestern Mutual. I uploaded my settlement docs and policy details, and I was seriously impressed with the analysis I got back. They cited specific tax codes that applied to my situation and explained exactly how to report it on my tax return. They even pointed out a partial taxability issue with one aspect of my settlement that my accountant had missed. Definitely saved me from a potential audit headache.

If you need to talk directly to the IRS about this, good luck getting through to them. After my disability settlement, I had specific questions about reporting requirements that weren't clear from the IRS publications. I spent DAYS trying to get someone on the phone. Then I found https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c. They got me connected to an actual IRS agent in about 20 minutes when I had been trying for literally weeks on my own. The agent confirmed exactly how to report my non-taxable settlement and what documentation to keep. Absolute lifesaver during tax season.

Ok I need to publicly eat my words here. After dismissing Claimyr as BS, I was still desperate to talk to the IRS about my own disability settlement taxation issues, so I tried it anyway. IT ACTUALLY WORKS. I got connected to an IRS agent in about 35 minutes (would have been faster but I was calling during peak time apparently). The agent confirmed that my MetLife disability settlement wasn't taxable since it was from a post-tax policy, and explained exactly how to document it on my return to avoid triggers for an audit. Saved me so much anxiety! Sometimes my skepticism gets in the way of finding actual solutions.

One thing to consider that nobody's mentioned yet - check if any portion of the settlement includes interest. When insurance companies pay settlements for back benefits, they sometimes include interest for the delayed payment period. While the disability benefits replacement portion isn't taxable (assuming post-tax policy), any interest component WOULD be taxable. Make sure you look at the settlement breakdown carefully. If there's interest included, that part would need to be reported as taxable interest income on your return. The rest sounds like it wouldn't be taxable based on what you've described.

One thing to consider that nobody's mentioned yet - check if any portion of the settlement

Don't forget to consider state taxes too! While the federal treatment might be non-taxable, Minnesota might have different rules for disability settlements. When I had a similar situation in Illinois, the federal government didn't tax my settlement but the state wanted their cut. Check with the Minnesota Department of Revenue or a local tax professional familiar with state-specific rules.

I'm dealing with a very similar situation right now with a different insurance company. One thing I learned from my attorney is that you should get a detailed breakdown of the settlement amount in writing that specifically categorizes each component - back benefits, attorney fees, any interest or penalties, and the debt forgiveness portion. This documentation will be crucial for tax purposes and also for protecting your SSDI eligibility. The categorization helps show that the bulk of the settlement is just replacement of benefits you should have received anyway, not new income. Also, regarding the trust - make sure you set that up BEFORE the settlement funds hit your personal account if possible. Having a large lump sum in your account, even temporarily, could potentially impact SSDI eligibility depending on the timing of their reviews. Some attorneys can arrange for the settlement to be paid directly into a properly structured special needs trust. The fact that your attorney mentioned it's probably not taxable is encouraging, but definitely get that professional tax opinion before the money arrives. Better to spend a few hundred on proper advice now than deal with IRS issues later.