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Are Montana Workers’ Compensation Settlements Taxed?

February 18, 2020 |

Receiving your settlement check in the mail may not mean the end of your workers’ compensation claim. You may still have to handle the taxation of your settlement. Although the Internal Revenue Service (IRS) does not collect taxes on most workers’ compensation settlements, exceptions to the rule exist. Come tax time, you may realize that part or all of your injury settlement is subject to taxation under federal laws. Although tax laws are always changing, current statutes in 2020 mean you may have to pay taxes on your workers’ comp settlement in Montana.

Most Settlements Are Not Taxable

The workers’ compensation system is designed to help workers in need after workplace accidents. Workers’ compensation settlements can enable a worker to obtain the medical care and financial support necessary to move on. The losses that are eligible for compensation after a workplace accident include medical bills, lost wages, disability costs and death benefits.

A workers’ compensation settlement could cover 100% of your accident-related medical bills (past and future), two-thirds of your gross weekly wages and the costs related to a disability. If your accident permanently took you out of work, for instance, you could qualify for permanent total disability benefits. You could use the money you obtain from a Montana workers’ compensation settlement to help pay for your medical bills, lost wages and household needs.

Before you cash your check and put the claim behind you, however, determine whether you will owe any taxes on the settlement. In general, the bulk of most workers’ compensation settlements are nontaxable. The law views workers’ compensation settlements as income for reporting purposes but does not tax the amount earned. You most likely will not owe the IRS any taxes on the settlement, and will not even have to list the amount awarded as income earned on tax documents. If you qualify for an exception, however, things may be different.

Exceptions to the Rule

A few important exceptions to the workers’ compensation taxation rule exist. First, you will need to pay taxes on your retirement plan benefits if your occupational injury or illness forced you to retire early. The IRS also taxes these benefits if your workers’ compensation settlement reduces your Social Security. Second, and the most common reason for the taxation of workers’ compensation settlements, is receiving settlements from multiple sources.

For example, if your work-related injury gave you a disability, you may qualify for Social Security Disability benefits. Accepting these benefits on top of workers’ compensation will require you to pay taxes on one or the other. Taxation will depend on the difference in the amount between the two benefit payments.

Another exception is if you listed the medical expenses for which you are receiving workers’ compensation as deductions on a previous tax year. The federal government does not allow you to recover tax benefits on the same amount twice. You cannot receive money back for your medical expenses one year, then receive tax-free compensation for the same expenses the next. If you previously deducted your medical bills, you may owe taxes on your workers’ compensation settlement this year.

Do Not Do Your Taxes Alone

If you received a workers’ compensation settlement after an accident in Montana in the past tax year, do not file your taxes alone. Hire an attorney and/or a tax professional to help you with the complicated filing process. You do not want to pay taxes on the same sum twice, nor do you want to illegally fail to pay taxes and face penalties for tax evasion.

Preparing your taxes with a professional can help you navigate this complex situation within the parameters of the latest federal and state tax laws. Hiring a lawyer to represent your workers’ compensation claim could also help, as your lawyer can organize your settlement based on portions that are taxable and not taxable. Hire a professional at tax time this season to make sure you file correctly.