Now that the year has come to a close, tax season will be upon us soon. There are a few things that you should be reminded of when filing your federal tax return if you are a recipient of Workers’ Compensation or Social Security Disability benefits.
Generally speaking, Workers’ Compensation indemnity benefits are not considered taxable income. You will not receive any sort of year-end statement from the insurance carrier or the Workers’ Compensation Board and you do not need to report the regular benefits you receive on your return (special considerations do apply).
If you are a recipient of Social Security Disability benefits, you will receive an SSA-1099 each year. Most SSD beneficiaries do not end up owing federal income taxes. Those that do usually have a working spouse or have some other passive income (such as income property or investments). As of 2011, recipients of SSD or SSI benefits did not have to pay federal income taxes if their income did not exceed $25,000.00 for a single person or $32,000.00 for a married couple.
You may have to pay taxes on a small portion of your lump sum past due benefits award but federal law allows individuals to apportion their past due benefits to previous years. This should lower or eliminate the taxable amount of the lump sum per year.
If you are or have been a recipient of both Workers’ Compensation and Social Security benefits, chances are an “offset” has been created. In these cases, Workers’ Compensation benefits are taxable in the same amount that the Social Security benefits have been reduced. For example, if your SSD payments are reduced by $250 per month due to your receipt of Workers’ Compensation, then $250 of your Workers’ Compensation benefits are taxable. Even in these instances, most recipients do not reach the threshold for taxable income to owe federal income taxes.
Tax laws and regulations can be very complicated and confusing. We urge you to talk to your tax-preparer regarding your specific circumstances.