Members of the Maryland Association of Certified Public Accountants are answering readers' tax questions through April 15.
Q: Last year, I got laid off from a company and we received a lump-sum payment as a result. In order to receive the payment, we had to sign a statement stating that we would never take part in either an individual suit or a class action brought against the company in the future concerning anything that happened to us while we were employees. I have been told that payments of this kind are not taxable. I need some guidance because there is a lot of controversy about it from people who worked with me.
A: Money received in settlement of personal injury claims (e.g., age discrimination) are excluded from income. But money received for a general release from possible future suit is probably not. All the facts, circumstances and exact wording of the document should be examined by a professional tax preparer or lawyer to determine proper treatment with certainty. Keep in mind that the burden will be on you to prove that you meet the necessary criteria to exclude the money from income.
Q: Is the whole amount of my railroad retirement tax-free for the state of Maryland?.
A: Railroad retirement income is broken out in "tiers." If any of your Tier 1 or Tier 2 income was taxable on your federal return, you deduct it from income on Line 27 of your Maryland return.
The above advice is for general purposes only and is not intended as legal, accounting or tax advice. Specific situations may vary.