Will Insurance Settlement Affect Medicaid?

A personal injury settlement is a monetary asset that can be counted. This means that receiving one could affect your Medicaid eligibility. Small to medium settlement sums, on the whole, have little or no impact on Medicaid. However, if the amount you receive exceeds the federal poverty threshold, you may be ineligible for future assistance.

Is a settlement considered an asset?

In California, the assets you own and acquire before you marry are normally recognized as separate property. Separate property is solely owned by you. When you get divorced, you keep all of your ownership rights to the property. Unless you extended ownership benefits to your husband at some point during your marriage, your spouse has no right to claim your separate property.

Is it true that your vehicle accident happened before you married? Were you able to get your personal injury settlement before you married? If that’s the case, the settlement should be treated as independent property. Your spouse should not be entitled to any part of your cash award.

However, if you transferred the funds to a joint bank or financial account, your spouse could argue that you intended to share the money with them. It may be easier to prove that your settlement is your separate property if you keep it separate.

Does a personal injury settlement count as income?

When paying taxes, the IRS permits settlements in personal injury cases to be deducted from gross income. Both lump sum and monthly payments are exempt from paying taxes.

Tax-exempt vs. Taxable Personal Injury Settlement Factors:

  • When damages for emotional suffering and mental anguish are linked to physical illness or injury, they are tax-free.
  • Even wages lost as a result of a personal injury lawsuit must be claimed as income.
  • When punitive damages are included in a personal injury settlement, they are usually taxable.

What is counted as income for Medicaid?

Medicaid applicants must usually submit verification of their monthly income (both earned and unearned) along with their application. Dividend checks, social security checks or award letters, salary stubs, alimony checks, and VA benefits checks or award letters are all examples. States may also utilize an electronic system to verify a candidate’s income. More information can be found here.

Will a settlement affect my Medicare?

In general, a personal injury or wrongful death settlement has no impact on Medicare benefits. If you anticipate future medical bills, this may be an exemption. In such situation, you may be required to establish a trust to cover future medical expenses until the trust is emptied, at which point Medicare will resume paying your injury-related bills. But that’s a topic for another episode, which we don’t have time to discuss here. The settlement has no bearing on your SSD benefits. Your settlement has no bearing on your Social Security retirement benefits.

Will a settlement affect my financial aid?

When it comes to college planning, parents of injured children should be proactive. Financial aid eligibility may be jeopardized if settlement money are not reported on the Free Application for Federal Student Aid (FAFSA). There is, thankfully, a tax-advantaged option for preserving settlement cash and financial aid eligibility.

The courts aim to make sure that the cash set aside for kids’ settlements can endure financial hardships. Because of the numerous risks involved, most jurisdictions will not approve financial settlements for minors. Structured settlements, minors’ trusts, and guardianship accounts are preferred by courts. Once the child reaches the age of majority, which varies by state, each of these options can be set up to pay out the settlement funds.

If the child intends to attend college, however, the rising costs of tuition, room and board, books, supplies, activity fees, and other expenses might quickly deplete the settlement proceeds.

Structured settlement payments can be set up to begin paying out after the projected graduation date, rather than at the age of 18 or earlier.

  • Allowing settlement funds to be counted for evaluating financial aid eligibility (assuming structured settlement payments will begin after college);
  • Income tax-free payments are guaranteed1 and backed by well-capitalized insurance companies with a proven track record of excellent performance.
  • Designing a flexible plan (for instance, structured settlement payments can supplement post-college income or provide a nest egg for more considerable expenses, such as a home purchase).

A special needs trust may be available to your client if he or she is a disabled minor. Because money stored in a special needs trust does not count as an asset, it has no bearing on financial help. The minor can benefit from income tax-free growth and an extra layer of financial security if the special needs trust is funded with a structured settlement.

An ABLE Account may also be a viable option if the handicap happened before the age of 26. ABLE Accounts, unlike special needs trusts, do have an annual contribution and lifetime contribution thresholds that vary by state. For a beneficiary to remain exempt from asset testing, ABLE Account balances must remain below the applicable criteria.

Sage’s professional team is up to date on the ever-changing financial landscape. To ensure that your clients receive the resources they require, contact your settlement consultant right once.

1 Guarantees are contingent on the issuing insurance company’s ability to pay claims.

How can I protect my settlement money?

Put your accident settlement payment in a separate account and don’t put anything else in it.

Your settlement funds must be kept in a separate, segregated bank account.

Do not mix your settlement funds with any other cash. This is known as “commingling monies,” because it loses the money’s “exemption,” or protection.

If you and your family have other sources of income, make sure to keep it out of the injury settlement account.

As a result, do not put a single penny into your settlement account until you can prove the funds came from the settlement.

In other words, don’t use this account to deposit a typical paycheck or cash from another source.

When declaring bankruptcy or if a creditor tries to garnish your wages, as long as you can verify that all of the money in your account comes from the injury settlement, you get to retain it.

You’ll need a “paper trail” consisting of copies of the settlement cheque and deposit statements proving that the settlement check was deposited into the account and that no other deposits were made.

If a garnishment is attempted on your account, contact our expert bankruptcy attorney for a Free Report on how to fight the garnishment and to discuss your specific circumstances.

Do you have to report settlement money on your taxes?

Internal Revenue Code (IRC) Part 61, which stipulates that all income, whatever of source, is taxable unless exempted by another section of the code, is the basic rule of taxability for money obtained via litigation settlements and other legal remedies.

Can I deduct attorney fees from a settlement?

Every year, as you prepare to file your taxes, consider what deductions and tax credits you are eligible for. Any legal fees you may have incurred are on your list of things to think about.

Legal fees that are deductible

Legal fees linked to your business, including rental properties, can generally be deducted. This is true even if the court case in which the legal expenditures were expended did not result in a victory.

  • Fees that are directly tied to running your business and are typical and required expenses (should be entered on Form 1040, Schedule C).
  • Fees for resolving tax concerns, providing advice, or preparing tax forms for your firm (should be included on Form 1040, Schedule C).
  • Rental fees or royalties on properties where you make money (should be included on Form 1040, Schedule E)
  • Fees associated with farm revenue and expenditures (should be included on Form 1040, Schedule F).
  • Fees associated with charges of unfair discrimination (should be included on Form 1040).

The following legal fees are also deductible, even if they are not related to your location of business:

  • If you qualify for the federal adoption tax credit, fees associated with adopting a child (should be included on Form 8839).

Legal fees that are NOT deductible

Any legal expenditures relating to personal matters are not eligible for itemized deductions. These fees, according to the IRS, include:

  • Fees paid in conjunction with the assessment, collection, or return of any taxes.
  • Fees for defending civil or criminal charges brought against you as a result of your involvement in a political campaign.

While not all types of legal fees are deductible, those that are must be itemized.

What does it mean to itemize your deductions?

When it comes to paying taxes, you usually have the option of taking the standard deduction or itemizing deductions. Both of these solutions will often lower your taxable income, resulting in lower tax payments. You must itemize your deductions rather than take the standard deduction to deduct your legal fees for the tax year.

The new tax law limits the sorts of itemized deductions a taxpayer can claim beginning in 2018, while simultaneously increasing the standard deduction. To put it another way, certain of the itemized deductions you may have claimed in previous years are no longer valid.

Miscellaneous deductions, for example, can no longer cover the following items:

The 2% rule

You may recall hearing about the “2% rule” while itemizing your taxes prior to 2018. This regulation permitted taxpayers who were unable to deduct certain work-related expenses to deduct a percentage of their itemized miscellaneous expenses that exceeded 2% of their adjusted gross income (AGI).

Deductions linked to the 2% rule have been suspended since 2018. However, if the legal fees are related to your work, you may be able to deduct them.

Awards from legal settlements and cases

If you received money as a result of a legal settlement or dispute, the award amount is almost certainly taxable and should be included in your gross income reported to the IRS. The sole exception is if you received the funds as a consequence of a lawsuit for physical harm or illness. But, as the IRS explains, there are other rules and exemptions that may apply. In most cases, the legal fees associated with these matters cannot be deducted from your taxes.

Record-keeping tips to make taxes easier

Make sure the nature of the services supplied is properly identified on your attorney’s invoices. If your attorney’s invoice does not describe the sort of legal advice or counsel you received, request that it be amended to contain all of the relevant information. You’ll be able to accurately substantiate legal fees you deduct on your taxes this way. If you ask for any bills that indicate charges for both deductible and nondeductible services to be separated, it will make the process a lot easier.

How much tax is taken out of a settlement?

The money from a lawsuit is normally taxed as ordinary income, and it isn’t subject to a specific tax rate just because it comes from a lawsuit. Your tax rate is determined by your tax bracket. If you’re single and earn more than $82,500 in 2018, you’ll be taxed at a rate of 24 percent.

What is the maximum income to qualify for free health care?

By completing a single application, you may learn more about your alternatives. It will determine if you are eligible for Medicaid coverage or financial assistance to help pay for commercial insurance through your state’s marketplace. You can seek for coverage even if you have previously been denied.

States With Medicaid Expansion

35 states, including Washington, D.C., expanded Medicaid eligibility to many low-income individuals, including those without dependent children, under the Affordable Care Act, while 14 states chose not to expand Medicaid under the statute. Nebraska and Utah, two other states, will extend Medicaid eligibility later in 2020. In states that have extended Medicaid, a single person earning $17,236 a year or a family of three earning $29,435 can qualify, while various family sizes can qualify at greater wages. Non-disabled people who are parents with very low income will be eligible in states that did not expand (the eligibility levels vary by state). Children are eligible for Medicaid or the Children’s Health Insurance Program (CHIP) if their family income is around $42,000 (for a family of three), or higher in some states, regardless of whether or not your state has decided to expand Medicaid.

State Insurance Marketplaces

You may be eligible for federal assistance if you purchase a health plan through your state’s marketplace, regardless of whether your state has extended Medicaid. This aid may lower your rates and minimize the amount of money you must pay out of pocket while seeking medical care. Although premiums for marketplace plans tend to rise each year, if you qualify for premium tax credits, the tax credit should cover the majority (if not all) of the cost increase. If you are single and your annual 2020 income is between $12,490 and $49,960, or if your household income is between $21,330 and $85,320 for a family of three, you may be eligible for tax credits to cut your premium (the lower income limits are higher in states that expanded Medicaid). The range varies depending on the size of the family. If you buy a plan through the marketplace and make between $12,490 and $31,225 per year ($21,330 to $53,325 per year for a family of three), you may be eligible for cost-sharing assistance. Special modified silver plans with lower deductibles, copays, and yearly out-of-pocket cost sharing restrictions are available.

How to Apply

You can enroll in Medicaid at any time, not just during open enrollment, if you qualify. You can apply directly with your state’s Medicaid agency or through healthcare.gov or your state’s marketplace website. Once you’ve enrolled in Medicaid, your state’s Medicaid office will send you a notice when it’s time to renew your coverage.