Wednesday, March 31, 2010

The Tax Man Cometh

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.

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.


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.

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.


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.

If you prepare your own taxes, or if you use an accountant to do so, you should be aware of these possibilities. You should also consider them in your future tax planning strategies. I am not an accountant and provide this information to you only as a courtesy and as something you should look out for in your annual tax planning. You should consult with a tax professional for your specific situation.


I have put some helpful links below for your further reading:

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