Worker's Comp settlement

[cpabsd]

My client has a proposed settlement from Worker's Comp. I don't believe such a settlement is taxable but cannot locate anything to back up my position. Also, will such a settlement have any impact on the Social Security disability benefits my client is currently receiving?

[Terry D EA]

See if this answers your question. Usually, benefits received from workman's compensation are tax exempt.

http://www.irs.gov/publications/p525/ar02.html#en_US_2012_publink1000229331

[cpabsd]

Thank you!

[FTS13]

I worked for a Worker's Comp/Personal Injury attorney, settlements are not taxable.

[Cathy]

Whereas worker's compensation settlements aren't taxable, social security offset by a worker's comp. settlement sometimes must be included in income. That usually happens when you have an inexperienced attorney, but it can happen!

If the wc settlement is written up as X number of $ for lost wages, social security will offset their payments to the injured (if the person has applied and been approved for social security disability benefits) until the lost wages dollars written out in the settlement are depleted.

EX: Taxpayer qualifies for $1,000 a month in social security benefits. The WC settlement specified that $40,000 of the settlement is for lost wages. Social security will keep 40 checks (40 x $1,000 = $40,000) AND send the taxpayer a 1099 at the end of the year for $12,000 that he must include on his return. The taxable portion of the social security goes through the same formula as normal social security payments would in order to obtain how much of the social security is actually counted as income on the taxpayer's return.

Holler if I can confuse you more!

Cathy

[Cathy]

Bonnie,

Yikes!!! I just re-read your original post. Be sure and tell your client to have his attorney make sure the settlement doesn't include any language about the settlement (or part of the settlement) being for lost wages....It will stop his social security checks dead in their tracks!