What Kind of Benefits Do You Receive?
If you’re receiving Social Security Disability benefits, Workers’ Compensation or payments from a personal injury settlement, your disability or injury has probably already caused enough worry about money.
You’ve lost income or the ability to work, and the injury is stressful on its own.
But then you think: Am I going to lose some of my benefits to taxes, too?
The good news is that benefits and settlements of these types often are not taxable.
But the rules are different for each type of benefit. And the federal government and state of Kentucky treat each benefit differently.
To help you understand what rules apply to the benefits you receive, the team at Morgan, Collins & Yeast has gathered the overview below.
Your situation might be different than the situations discussed here. Always consult a tax professional to get advice specific to you.
Or for help with your disability benefits, Workers’ Comp claim or personal injury case, contact us today.
Are My Social Security Disability Benefits Taxable?
For the majority of people who receive Social Security Disability benefits, your benefits aren’t taxable.
The state of Kentucky doesn’t impose any state income tax on Social Security Disability benefits, but the federal government does under some circumstances.
If you or your spouse have an additional source of income, it’s possible you could be taxed. But even then, the portion of your benefits that has to count as income toward taxes cannot go over 85%.
So how do you know if you’ll owe taxes?
First, calculate your combined income. You do that by adding your adjusted gross income, nontaxable interest and half of your Social Security benefits.
If you file your tax return as an individual and your combined income is:
- Below $25,000: You don’t pay taxes on your benefits.
- Between $25,000 and $34,000: Up to 50% of your benefits could count as taxable income.
- Above $34,000: Up to 85% or your benefits could count as taxable income.
If you file a joint return and your combined income is:
- Below $32,000 You don’t pay taxes on your benefits.
- Between $32,000 and $44,000: Up to 50% of your benefits could count as taxable income.
- Above $44,000: Up to 85% or your benefits could count as taxable income.
If you do owe taxes on your benefits, the tax rate is based on your level of total taxable income.
Do I Owe Taxes on My Workers’ Comp Benefits?
Generally, Workers’ Comp benefits are not taxable at the state or federal level, with one exception:
- If you receive both Workers’ Comp and Social Security Disability benefits, a portion of those benefits might be taxable if they exceed 80% of your average current earnings.
When you’re receiving both Social Security Disability and Workers’ Comp, in Kentucky, the Social Security Administration lowers, or “offsets,” your Social Security payments based on your Workers’ Com.
That way, the combined amount you get from both types of benefits generally won’t exceed 80% of your average current earnings before you got sidelined by health problems.
But even though you’re not getting a portion of your Social Security Disability benefits because you’re also getting Workers’ Comp, the part of your SSD that gets offset still counts toward taxes.
So the rules listed above for taxing Social Security Disability benefits apply to this amount, even though the money is technically coming from Workers’ Comp.
Questions? Talk to an experienced attorney today. Contact us now.
What If I Received a Personal Injury Settlement?
Like Workers’ Comp, personal injury settlements are generally not taxable, with a few notable exceptions.
Awards for personal injury or personal sickness, as well as emotional distress or mental anguish resulting directly from the injury or sickness, are not taxable.
If, though, you receive an award for one of the following, it may be taxable:
- Interest on a personal injury settlement
- Emotional distress or mental anguish not caused by personal injury or personal sickness
- Punitive damages
- Lost wages or loss of income
If you think you might fall into one of these exceptions — or you have any questions at all about your case — there’s no cost for talking to us at Morgan, Collins & Yeast.