How Does Workers’ Comp Affect My Tax Return?

The simple answer is not at all. Workers’ compensation benefits aren’t taxable, at the state or federal level. Moreover, these and other government benefits are usually exempt in bankruptcy. Workers’ compensation benefits help families get by. Often, however, the partial wage replacement isn’t enough, especially following a fatal or catastrophic injury.

The rules are different in nonsubscriber claims. If the employer didn’t have workers’ compensation insurance, a defective product caused the injury, or in other such cases, compensatory damages, for economic and noneconomic losses, usually aren’t taxable. Punitive damages usually are taxable. Different taxing authorities have different rules in different situations.

Workers’ Comp Benefits

In most states, lost wage replacement and medical bill payment benefits usually last up to two years. That’s usually the right amount of time for victims to either fully recover or go on disability.

Most temporary disability victims receive two-thirds of their average weekly wage (AWW). Their forefathers gave up the other third in the early twentieth century Grand Bargain. In exchange, management funded a no-fault insurance system. So, injured workers aren’t made whole, from a financial standpoint. But, they don’t have to prove employer negligence. If the system works right, that’s a good deal for workers.

Unfortunately, the system usually doesn’t work right. Almost every year, the bureaucracy gets bigger, insurance companies meddle in it more, and benefits go down.

These same principles apply to medical bill payment. Injury recovery rates vary, but insurance adjusters usually don’t care. Instead, they use boilerplate charts to approve payments and only approve the cheapest available medical solutions.

Discharging Tax Debt in Bankruptcy

The point about workers’ comp benefits and bankruptcy brings up a related question, which is does bankruptcy take care of past-due taxes. So, we might as well address that question as well.

Generally, unsecured debts, like credit card bills, are dischargeable in bankruptcy. Secured debts, like home mortgage payments, aren’t dischargeable, if the debtor wants to keep the secured property.

Past-due taxes are in-between debts. Like student loans and past-due alimony, back taxes are priority unsecured debts. These obligations are only dischargeable in some situations. Usually, the debt must be at least three years old and the returns must have been on file for at least two years. Additionally, the taxing authority must not have assessed (fully calculated) the debt in the last 240 days.

If debtors can’t discharge debt in a Chapter 7, they can usually repay it in a Chapter 13. Only some people qualify for IRS repayment plans, which usually include penalties and interest. In contrast, almost everyone qualifies for Chapter 13. Additionally, it’s usually illegal for the IRS to add penalties and interest to the balance if the debtor files bankruptcy. The protected repayment period in a Chapter 13 lasts up to five years.

If you think it’s time to talk to a lawyer, use AskLegally to book a free lawyer consultation with a lawyer near you.  Or check out our workers’ comp settlement chart.

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