Tax Day is here again. Throughout the year, I am asked if the settlement from a car accident needs to be reported as income on taxes. Also, I am asked if the workers’ compensations benefits and Social Security Disability benefits are taxable. My standard answer is that I am a personal injury attorney and not a tax attorney and they should consult with a tax attorney for solid advice in that regard. I still say that, but let’s examine what the IRS says about an automobile accident settlement (or other personal injury matter), a workers’ compensation claim and a Social Security Disability Claim.
The IRS’ position of taxes on personal injury settlements is if a person receives proceeds from settlement of a lawsuit (or claim), whether you must include the settlement proceeds in your income depends on all the facts and circumstances in your case. If a person receives a settlement for personal physical injuries or physical sickness and did not take an itemized deduction for medical expenses related to the injury or sickness in prior years, the full amount is non-taxable and does not have to be included on income taxes. However, if a person receives a settlement for personal physical injuries or physical sickness, you must include in income that portion of the settlement that is for medical expenses you deducted in any prior year(s) to the extent the deduction(s) provided a tax benefit. Further, the proceeds you receive for emotional distress or mental anguish originating from a personal physical injury or physical sickness is generally not taxable. However, if the emotional distress or mental anguish proceeds do not originate from a personal physical injury or physical sickness, you must include them in your income. However, the amount you must include is reduced by: (1) amounts paid for medical expenses attributable to emotional distress or mental anguish not previously deducted and (2) previously deducted medical expenses for such distress and anguish that did not provide a tax benefit. Attach to your return a statement showing the entire settlement amount less related medical costs not previously deducted and medical costs deducted for which there was no tax benefit. (Now, you know why I tell my clients to consult with a tax attorney!) As for lost wages, if you receive a settlement in an employment-related lawsuit; for example, for unlawful discrimination or involuntary termination, the portion of the proceeds that is for lost wages (i.e., severance pay, back pay, front pay) is taxable wages and subject to the social security wage base and social security and Medicare tax rates in effect in the year paid. These proceeds are subject to employment tax withholding by the payor and should be reported by you as ‘Wages, salaries, tips, etc.” on line 7 of Form 1040.
As for the IRS’ position on workers’ compensation benefits, the IRS directs that amounts you receive as workers’ compensation for an occupational sickness or injury are fully exempt from tax if they are paid under a workers’ compensation act or a statute in the nature of a workers’ compensation act. The exemption also applies to your survivors. However, if part of your workers’ compensation reduces your social security received, that part is considered social security benefits and may be taxable. Again, this is why it is important to talk with a tax attorney if you receive Permanent Total Disability workers compensation benefits or other work comp benefits which may reduce your social security benefits.
Lastly, we turn to the IRS’ directions as to taxes on SSD benefits. As for Social Security Disability benefits, some people who get Social Security have to pay taxes on their benefits. According to the IRS, about one-third of current beneficiaries pay taxes on their benefits. The amount of social security benefits that must be included on your income tax return and used to calculate your income tax liability depends on the total amount of your income and benefits for the taxable year. To find out whether any of your benefits may be taxable, compare the base amount for your filing status with the total of One-half of your benefits and all of your other income, including tax-exempt interest. If this sum exceeds the base about for your filing status, some of your Social Security Disability benefits may be subject to income taxes. If you are married and file a joint return, you and your spouse must combine your incomes and social security benefits when figuring the taxable portion of your benefits. Even if your spouse did not receive any benefits, you must add your spouse’s income to yours when figuring if any of your benefits are taxable, if you file a joint return.
So, as you can see, whether or not you have to pay taxes on a car accident settlement, workers’ compensation claim or on Social Security Disability benefits is not always easy to answer. It is important that you consult with a tax attorney on the impact of any benefits/settlement received. However, before taxes can be considered, there has to be a settlement or a success work comp or SSD claim. To help in that regard, contact Attorney Matthew Noyes to battle for your benefits. Personal Injury Attorney Matthew Noyes represents those injured in car accidents, motorcycle crashes, bicycle accidents, pedestrian accidents and other types of personal injury matters. He also assists clients in Florida workers compensation claims and represents client in front of the Social Security Administration for SSD benefits. His Clearwater law firm – Perenich Caulfield Avril Noyes – is one of the oldest personal injury law firms in Pinellas County. Call Attorney Matthew Noyes now at 727-796-8282 or simply click here to schedule a free case consultation.