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Are Workers' Compensation Benefits Taxable?

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Tax season can be a difficult time for many people who find out that they have to pay more in federal and state taxes than they already have. For people who rely on workers’ compensation benefits to get by, the threat of losing even a small portion of their finances to more taxes can be harrowing. But do people who are getting wage replacement benefits through workers’ comp really need to worry about taxes cutting into those benefits?

For the most part, the answer is no. The Internal Revenue Service (IRS) considers most forms of workers’ compensation benefits as nontaxable income. Any form of income considered as nontaxable should be exempt from further collections at both state and federal levels, allowing workers’ compensation beneficiaries to keep as much as they can and plan their finances accordingly. Even receiving your workers’ compensation benefits through a lump sum settlement can be tax-free based on your situation.

However, there are a few exceptions to this IRS rule. Before you file your taxes again, it will help to know about them.

Workers’ Comp & Social Security Overlap Can Cause Taxation

People who receive both workers’ compensation benefits and Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) can be taxed for their workers’ comp. The taxation will generally not apply to all you have received that tax year, though. Instead, it should apply to a portion determined by the offset to your SSDI.

Example: You receive workers’ compensation of $500 a month and SSDI of $500 a month, but the Social Security Administration (SSA) determines you only require $800 of income a month to live comfortably. Your SSDI check is therefore reduced to $300 each month to offset the amount, making a dent of $200. You would only be taxed on $200 worth of workers’ compensation each month or $2,400 a year.

Additional Benefits That Might Be Taxable

You should also be aware that just because your workers’ compensation benefits are nontaxable, that does not mean any other income you receive will be protected. Retirement benefits, interest payments, investments, money won in lawsuits or through inheritance, and even income you get for small jobs as you recover can still be taxed.

Other Tax-Deductible Costs

Obtaining workers’ compensation benefits is often easier said than done. Insurance companies and employers alike sometimes try to downplay a worker’s injuries in order to avoid significant benefits payouts. The insurance company wants to protect its bottom line and the employer wants to avoid an increase in its premiums. As a result, many workers’ compensation claimants have to go through legal channels to pursue and collect the financial aid they deserve.

While this is not ideal, the good news is that any legal fees related to your pursuit of workers’ compensation could be tax-deductible. The money you spent on attorney fees and courtroom costs, for example, could probably be a deduction on your next tax filing. Although this is not the same as being refunded, it is still helpful for people who need to pay close attention to their finances.

Questions? Contact Alvandi Law Group

To learn more about workers’ compensation law and how it pertains to you, Alvandi Law Group in Orange County would be happy to help. Our experienced team of workers’ comp attorneys can assist you with filing a claim, challenging a denied claim, and more. Call (800) 980-6905 to schedule an initial consultation with our team.

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