Are Worker’s Compensation Claims Taxable in Massachusetts?
Tens of thousands of people in Massachusetts rely on workers’ compensation benefits every day. When you are injured while on the job, you depend on workers’ compensation to help you pay your medical bills so that you can recover from your injuries and get back on your feet. One of the biggest concerns that many people have is whether their benefits are taxable income.
In general, the IRS treat workers’ compensation benefits as tax-free. Each state has its own rules and regulations on how workers’ compensation benefit payments are treated for tax purposes. In Massachusetts, workers’ compensation benefits remain tax-free if the insurance company makes the payments according to state law. However, if you receive Social Security disability benefits, you might face an offset that may impact your taxes. There are ways that a lawyer can help you reduce or avoid the offset.
Learn from the Massachusetts workers’ compensation lawyers at the Law Office of John J. Sheehan about the tax consequences and benefits of workers’ compensation insurance payments in the Commonwealth of Massachusetts. If you have questions, you deserve to have them answered. We can offer you a free initial consultation when you schedule today by calling (617) 925-6407.
Workers’ Compensation and Federal Taxes in Massachusetts
You might be wondering if the workers’ compensation benefit payments you receive will be considered taxable income by the IRS. Fortunately, the answer is no. Workers’ compensation checks are not subject to federal taxes. You may collect your benefit payments without reporting them as taxable income in your federal filings. According to IRS Publication 525, any amounts that a victim receives through workers’ compensation for sickness or injury sustained while at work are tax-exempt if they are paid according to the relevant state statute.
In other words, the workers’ compensation insurance payments must comply with state law in order to avoid taxes. In Massachusetts, that statute is the Workers’ Compensation Act (WCA), also known as Chapter 152. Massachusetts originally passed the WCA in 1911, becoming the second state in the union to pass workers’ compensation legislation. If you are considering accepting a settlement structure on your workers’ compensation benefits in Massachusetts and want to ensure that you are avoiding taxes on your benefits under state law, be sure to speak with one of our experienced Boston workers’ compensation attorneys first.
Offsets for Workers’ Compensation Benefits if You Receive Disability Insurance in Massachusetts
According to statistics from the Bureau of Labor, there are almost four workers’ compensation claims filed for every 100 full-time workers. These claims can be quite complex depending on the nature of the injury and the prognosis for recovery. The situation becomes more complicated if you are already receiving Social Security Disability Insurance (SSDI) benefits and hoping to also receive workers’ compensation benefits. Under Massachusetts law, if a work injury victim exceeds a certain threshold, in combined benefits from SSDI and workers’ compensation, their SSDI benefits will be reduced by that amount. This is called an offset.
Offsets themselves are not a “tax” in the strictest sense of the word. However, the amount of the offset will be subject to income tax. Additionally, an offset reduces the amount of money going into your pocket, so it is important that you understand how it works (and how you may be able to avoid it).
If you meet a certain income threshold and are subject to an offset, the government may decide that the offset portion of your workers’ compensation payments is actually part of your disability benefits. Disability benefits are subject to taxes. Therefore, money that you believed would come tax-free through your workers’ compensation payments may actually be subject to the applicable disability benefit tax rate.
The threshold that triggers the offset is referred to as the “80% ACE,” which stands for 80% of the beneficiary’s average current earnings. If the combination of SSDI and workers’ compensation benefits per month exceeds 80% of the ACE, the SSDI benefits will be reduced until the limit is reached. In other words, if your combined workers’ compensation and disability benefits are too high, they will be reduced proportionally. That reduction is then taxed at the appropriate level.
Your 80% ACE can be calculated by using a few key figures, such as your highest income year over the past five years. To get an assessment of how much you might lose out on through your offset and additional income taxes, contact one of the experienced Malden workers’ compensation attorneys at the Law Office of John J. Sheehan.
How to Avoid Tax on Offsets for Workers’ Compensation Benefits in Massachusetts
If you are concerned about the impact of taxes on your disability benefits due to a workers’ compensation claim in Massachusetts, you should learn more about a tool called a “Sciarotta Allocation.” A Sciarotta Allocation is a completely legal method of prorating the payments from a workers’ compensation settlement agreement to benefit you over the course of your life expectancy. By doing this, you can avoid hitting the 80% ACE cap on combined monthly benefits and retain your earlier SSDI distribution amount tax-free.
You must agree to a workers’ compensation settlement in order to engage in a Sciarotta Allocation. To do this, you will have to complete and submit multiple complicated forms with an administrative court in Massachusetts. The forms must be reviewed and approved by an administrative judge. For this reason, we strongly suggest that you hire an experienced Wakefield workers’ compensation attorney for your preparing your claim and settlement effectively.
Concerned About Costs of a Workers’ Compensation Claim in MA? We Can Help
If you’re currently applying for workers’ compensation in the Boston area and are uncertain about next steps, it’s important to have knowledgeable legal representation. A qualified Somerville workers’ compensation attorney can be the resource and ally you need for recovery. Call the Law Office of John J. Sheehan today at (617) 925-6407 to get started for free.