Do I Have to Pay Taxes on My Benefit Payments or Personal Injury Settlement?

biggam fox skinner burlington office

During tax season, many clients ask us if they owe taxes on money they’ve recovered from benefit payments or personal injury settlements. Fortunately, the short answer is no, which is excellent news! However, it’s important to note that Social Security disability benefits are taxed, and the amount of money you owe could depend on several different factors.

Do I Owe Taxes?

I Received Workers’ Compensation Benefits or a Personal Injury Settlement

This money isn’t taxable because it was provided as restitution for an injury. These payments are meant to cover your medical bills, lost wages, loss of earning capacity, and more.

Even so, there are a few things you do need to be aware of:

  • You can’t claim this money as “earned income”
  • Because workers’ compensation payments are “unearned income,” they may prevent you from applying for property tax abatements or renter rebates.

Be sure to talk to a tax specialist if you have any specific questions or concerns.

I Received Workers’ Compensation and Social Security Disability (SSDI)

If you’re simultaneously receiving workers’ compensation benefits and Social Security disability benefits (SSDI), your SSDI benefits might be reduced and could also be taxed. In this scenario, the 1099 form you receive from the Social Security Administration (SSA) may include money that the SSA never actually paid you. This is because the money from workers’ compensation has offset (reduced) the amount of SSDA money you can receive. In other words, you could get taxed on SSDI that you didn’t even get! This situation is complicated and it’s best to talk to an attorney who has experience with both types of benefits.

I Received Social Security Disability Benefits

Social Security disability benefits are taxable in Vermont, but not in the same way as most other incomes.

The amount you owe can depend on three factors:

  1. Do you have other sources of income?
  2. Do your Social Security benefits cover more than one tax year?
  3. Did you also receive workers’ compensation benefits?

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 as soon as possible.

Free Tax Assistance Programs

Tax Prep from Vita

You can benefit from the IRS’s Volunteer Income Tax Assistance program (VITA) if you earned $55,000 or less in 2018, aren’t fluent in English, or suffer from a disability. If you meet the program’s eligibility requirements, a VITA volunteer can help you file your tax return electronically. They can also determine if you qualify for any tax credits that can let you keep more of your income.

Find a free VITA tax filing assistance location near you:

Vermont Legal Aid

Vermont Legal Aid’s Low-Income Taxpayer Clinic offers free or low-cost assistance to low-income taxpayers who have a dispute with the IRS about an audit, tax debt, levy or lien. Get in touch with the clinic by filling out their form or call 1-800-889-2047 to find out if you qualify.

AARP’s Tax-Aide

AARP provides free tax assistance and preparation through its Tax-Aide program. Find your closest location using their Tax-Aide Locator.

Your 2018 tax return is due Monday, April 15, 2019, so get in touch with an expert soon if you have questions.

Contact the attorneys at Biggam Fox Skinner if you have questions about filing a workers’ compensation or personal injury claim. Our award-winning firm is proud to provide knowledgeable guidance and personalized legal services and to the residents of Vermont. Call us at (802) 445-9141 or fill out an online form to schedule a free case evaluation today.