Are Houston Industrial Accident Settlements Taxed?
Whether you’re just starting or in the middle of negotiating an industrial accident settlement, you’re probably curious about one thing: are industrial accident settlements taxed? The good news is that most work-related injury settlements are not taxable. However, there are some exceptions.
Let’s explore the IRS’s and the State of Texas’s stance on workers’ compensation, and what parts of industrial accident settlements might be taxed.
The IRS and the State of Texas Do Not Tax Workers’ Compensation Settlements
The Office of Workers’ Compensation Programs, or OWCP, is responsible for paying out workers’ compensation. According to the IRS, “Compensation paid by OWCP is not subject to income tax.” If your industrial accident settlement is comprised totally of workers’ compensation payments, you do not have to pay any federal or state taxes on it.
However, the amount of workers’ compensation you’ll be paid depends on if you have dependents or not. If you have dependents under 19 or a spouse, you will be paid 75% of your salary. You will be paid 66 and two-thirds percent of your salary for employees without dependents.
Other Parts of Industrial Accident Settlements That Aren’t Taxed.
Workers’ compensation is only one part of an industrial accident settlement. Fortunately, other parts of industrial accident settlements are also exempt from taxation, including:
- Pain and suffering
- Mental anguish
- Medical bills
- Loss of consortium
- Loss in quality or enjoyment of life
- Payments for services you need after an industrial accident (childcare, for instance)
If the reason for a company compensating you is to make you financially whole following an industrial accident, you will not have to pay taxes on those payments, whether it’s a lump sum or paid in installments.
Exceptions To These Rules
Like anything to do with money or law, the rules for taxing industrial accident settlements aren’t always straightforward. Here are some parts of your industrial accident settlement that might be taxed.
Social Security Disability Insurance and Supplemental Security Income
If you receive payments for SSDI or SSI and workers’ compensation, a portion of your total payments may be reduced. This may occur if a combination of SSDI, SSI and workers’ comp payments exceed 80% of your average earnings before an industrial accident made you disabled or unable to work.
Likely, the government will reduce your SSDI payments to reach that number. While that’s not paying taxes in the traditional sense for all practical purposes, it’s almost the same.
Fortunately, this does not apply to Social Security retirement benefits.
Sometimes, a plaintiff may seek punitive damages from an employer after an industrial accident. This is might be the case when employers have committed acts of gross negligence, ignored defective equipment, or committed wrongful termination. Unlike workers’ compensation, the goal of seeking punitive damages is to punish the employer for wrongdoing.
Payments for punitive damages are taxable and should be listed as “other income” on your tax documents.
Compensation for emotional distress is complicated. If emotional distress occurs as a direct result of an industrial accident, compensation for it isn’t taxed. However, if a court or judge doesn’t deem your emotional distress as directly related but still awards damages to you, compensation for it may be taxed.
Compensation for Lost Wages and Lost Future Income
If an industrial accident has left you unable to work, you may seek compensation for lost future wages and the inability to work later in life. This part of your settlement may be taxed.
Some industrial accident cases take years to resolve. If this is the case, you may be awarded interest based on the original amount of your lawsuit. This interest is, unfortunately taxable.
How To Minimize Your Tax Burden Following an Industrial Accident Settlement
If you work with an experienced industrial accident lawyer, they may be able to help you pay less or no taxes on parts of your settlement.
The first tactic a lawyer will use is called allocating damages. The IRS will tax certain parts of your settlement based on the reason for payment. A skilled lawyer may be able to pursue larger amounts for non-taxable reasons instead of allocating them to taxable categories of compensation.
An industrial accident lawyer may also help you structure settlement payments over several years to reduce your tax liability. That doesn’t mean that lump sums are always taxed, but your current financial situation may make that so. In this scenario, it’s best to work with both a lawyer and financial professionals.
Be Prepared For Taxes After an Industrial Accident Settlement
To be ready for any taxes you may owe after an industrial accident settlement, you should record everything:
- Medical expenses
- Legal fees
- Lost wages
- All income you receive from the settlement
- Social Security benefits
- Extra costs from living with a traumatic injury
If you’ve always handled your own taxes, now’s the time to find a tax professional specializing in dealing with settlements. They can help you determine if you should take itemized or standard deductions and save you from late fees from the IRS (in some cases, you may need to pay estimated quarterly taxes).
How Do I Know What’s Best For Me?
If you’re in the middle of an industrial accident lawsuit, you’re stressed physically, emotionally, and financially. Don’t suffer those burdens alone — trust the Houston industrial accident attorneys at Morgan Legal Group.
For years, Houston attorney Clinton Morgan has spent years helping clients get fair settlements from Texas’s biggest industrial employers. Having worked as a safety manager before completing law school, he’s experienced in all things industrial. We fight for fair compensation and know how to structure industrial accident settlements to get our clients more for their time and money.
Contact us today for help with your industrial accident settlement in Houston. Consultations are free, and we don’t get paid until you do.