Are My Vermont Workers’ Compensation Benefits Taxed?
Questions to Ask A Workers' Compensation Lawyer
During tax season, clients often ask if they owe taxes on money they got in the form of workers’ compensation benefits, personal injury settlements, or Social Security disability benefits.
The short answer is: In Vermont, workers’ compensation benefits are not taxed and personal injury settlements are not taxed, but Social Security disability payments are taxed. Our attorneys answer three common questions about how an injury or disability payment could affect your tax return.
1. Do I Have to Pay Taxes on My Vermont Workers’ Compensation Benefits or My Personal Injury Settlement?
Money you get from a workers’ compensation claim or a personal injury settlement is not taxed because it was recovered for an injury, and the law says that type of payment cannot be taxed. No part of your settlement or award will be taxed—not the expenses, the fees, or your money. The only exception to this is if you are also getting Social Security disability payments, which we explain below. You will not receive a W2 for any money you get from workers' compensation because it is not considered taxable income.
It's important to be aware that even though these benefits are not subject to income tax, they can affect your eligibility for certain income-dependent allowances, such as property tax credits and renter rebates.
Be sure to talk to a tax specialist if you have any specific questions or concerns. See our blog post on Free Tax Preparation Help for more information.
2. What If I Get Workers’ Compensation AND Social Security Disability Payments?
If you’re getting workers’ compensation benefits and Social Security disability benefits (SSDI) at the same time, your SSDI benefits might be reduced (offset) by the amount of your workers’ compensation payments, and they could also be taxed. In this situation, your 1099 from Social Security Administration (SSA) may list income that the SSA never actually paid you because it was offset due to workers’ compensation payments. This situation is complicated and it’s best to talk to an attorney at BFS. We have experience with both types of benefits.
3. Are My Social Security Disability Benefits Taxed?
In Vermont, Social Security disability benefits are taxed, but not in the same way as most other incomes. The amount you owe depends on three factors:
- What is your income? If your total income is below a certain threshold, you won’t owe federal taxes on your disability benefits. If you have other income that puts you over the threshold, then part of your disability benefits may be taxed. For more information, view the Social Security Administration’s Benefits Planner or talk to a tax specialist.
- Do your Social Security benefits cover more than one tax year? If you got a large, lump-sum check for retroactive benefits that cover more than one year, this can affect your taxes. Consult with a tax specialist—such as a certified public accountant (CPA) or a lawyer who specializes in tax issues—to see if you will owe tax on any portion of that amount.
- Did you also get workers’ compensation benefits? See the section above on receiving both types of payments.
Tax Day is Now May 17, 2021
Taxes are due Monday, May 17, 2021, so don’t delay. If you are in any doubt about whether you owe tax on your workers’ compensation benefit payments, personal injury settlement, or Social Security disability benefits, contact a CPA, a tax attorney, or a free tax preparation service soon.