If there is money coming into the house, the tax man will find a way to come and get it!!! I have outlined a few situations below which affect clients who receive certain monetary benefits as a result of legal cases or social security entitlements.
PERSONAL INJURY CLAIMS
Clients often call in to the office to ask if their personal injury recovery is taxable. Generally speaking, unless there is a specific number allocated as income loss, proceeds from a personal injury settlement are not considered taxable income as they are meant to reimburse the client for noneconominc damages such as pain and suffering.
EMPLOYMENT DISCRIMINATION CLAIMS
One category of recovery which falls into the income bucket is a settlement for wrongful discharge or employment discrimination. This is because a major portion of those claims are specifically seeking lost wages due to the discrimination. However, there is a reduction for attorney fees paid on the amount.
SOCIAL SECURITY BENEFITS
Some people who get Social Security Disability or retirement benefits will have to pay taxes on their benefits. SSI benefits are not taxable. You will be affected only if you have other income in addition to your Social Security benefits. The amount of taxes you might have to pay will vary depending upon whether you file as an individual or jointly with your spouse.
WORKERS’ COMPENSATION BENEFITS
Worker's compensation benefits alone are not taxable. This is because the amount you receive as benefits is already reduced to reflect income taxes having been removed from your paycheck. However, combined SSD and WC benefits may be taxed and you should be aware of this. Even though the WC benefits by themselves are not taxable, they become part of the taxable income when, combined with SSD benefits, they reach a certain threshold which changes periodically as the SSA(Social Security Admininstration) amends them. The SSA should send you an annual report of what you have been paid. If you think the IRS is overtaxing you, you should check it out with your accountant and have it taken care of by your accountant.
I have put some helpful links below for your further reading:
- An IRS page: http://www.ssa.gov/planners/taxes.htm
- An article on the National Organization of Social Security Claimants’ Representatives: http://www.nosscr.org/tax.html
- For a short page with tax tips on this subject: http://www.bankrate.com/brm/itax/tips/20010115a.asp
- You can also contact the Taxpayer Advocate Service, an independent entity within the IRS for help: 1-877-777-4778 (toll free), or www.irs.gov/advocate.