Here’s what you need to know.
Do you still report workers compensation on your tax returns?
No. Unless you meet one of the taxable exceptions listed below, you do not even have to report your workers compensation payouts.
It’s always a good idea to speak to an accountant before making assumptions, but you’re not even going to receive a tax form that tells you these benefits have been reported to the IRS.
Are there taxable exceptions?
There are a few taxable exceptions.
For example, some of our clients have ended up with workers compensation claims that were, at first, denied. So they paid their own medical expenses, claimed those on their tax return, and then later got reimbursed.
They will end up having to pay the difference between the taxes they would have paid without the deduction and the taxes they did pay. This is rarely a very large amount.
If you get SSI Sor SSDI in addition to your workers comp benefits then your workers comp benefits can be taxed.
What about lump sum settlements?
Lump sum settlements work in about the same way. They aren’t taxable unless you trigger the specific exceptions above, plus one more.
That is: if you put your lump sum settlement into an investment account and earn interest on that money then you can be taxed on the capital gain. That is, if you put $40,000 in an interest-bearing account and earn $4000, then the $4000 becomes taxable income under the capital gains rate.
The amount you’re taxed under the capital gains rate depends on the tax bracket you’re in. For a short-term capital gain—you withdraw that money after a year or less—that rate ranges between 10% and 37% based on your income.
For a long-term capital gain it ranges between 0% to 20%.
Get help from experts!
When filing your taxes we recommend getting help from an expert accountant. When trying to get help getting your employer to pay your workers compensation claim at all, we recommend turning to us: the experts and attorneys at Talone Law.
We’ve helped hundreds of New Jersey residents navigate the workers compensation process, get fair treatment, and get paid. We can help you, too. Call us today to set up a consultation.