Are Maryland Workers Compensation Benefits Taxable?

Are Maryland Workers Compensation benefits taxable?

Amounts you receive as workers’ compensation for an occupational disease or accidental injury on the job are not taxable by the state or federal government if they’re paid under the Maryland Workers Compensation law. The exemption also applies to Maryland Workers Compensation death or dependent survivor’s claims as well as temporary total, medical benefits, vocational benefits and your permanent injury award or permanent total award as well as money from the Subsequent injury fund.

Accrued leave payment.

If you retire on disability, any lump-sum payment you receive for accrued annual leave is a salary payment. The payment is not a disability payment. Include it in your income in the tax year you receive it.

Return to work.

If you return to work after qualifying for workers’ compensation, salary payments you receive for performing light duties are taxable as wages.

Pension based on years of service.

If you receive a disability pension based on years of service, in most cases you must include it in your income. If you retire after a work- related accident on a regular years of service retirement which you were entitled to whether you had an accident at work or not the benefits are taxable. The tax exemption, however, doesn’t apply to retirement plan benefits you receive based on your age, length of service, or prior contributions to the plan, even if you retired because of an occupational sickness or injury.

However, if the pension qualifies for the exclusion for a Service-connected disability (discussed earlier), don’t include in income the part of your pension that you would have received if the pension had been based on a percentage of disability. You must include the rest of your pension in your income.

Accrued leave payment.

If you retire on disability, any lump-sum payment you receive for accrued annual leave is a salary payment. The payment is not a disability payment. Include it in your income in the tax year you receive it.

If you receive a workers’ compensation award and also receive social security disability there may be some taxes due on the workers compensation benefits. While workers compensation benefits are not taxable, social security benefits may be taxable if part of your workers’ compensation reduces your social security or equivalent railroad retirement benefits received, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable by the federal government. The amount of workers compensation that is taxable is the same amount by which social security reduces your disability payments.Thus if the social security administration reduces your monthly social security check by ex. $250.00 due to the workers compensation offset, then $250.00 of your workers compensation check is taxable. Your income from both may still not meet the federal minimum income that requires taxes to be paid. Your attorney can try to structure the settlement to minimize the offset and therefore minimize or eliminate the tax on the workers compensation benefits.This tax issue can raise it,s ugly head when a married couple on social security files jointly so that a combination of their income puts them into a taxable bracket.

For the majority of people, Social Security Disability benefits are not taxable. This is true for people who have income in addition to disability benefits as well as those who do not. (Most of the one-third of disability recipients who do pay taxes on benefits receive SSDI benefits, not SSI. SSI recipients rarely have to pay taxes, because if they had enough income to be taxed, they wouldn’t qualify for SSI.)

If you or your spouse have another source of substantial income, it’s likely your SSDI benefits could be taxed by the federal government. Here’s how it works. If you file your taxes as an individual, and your income is more than $25,000 per year but less than $34,000, you would have to pay taxes on about half the value of your benefits. If you are married and you file jointly, you can have a combined income of up to $32,000 before having to pay taxes on half your benefits.

If you are single and you make more than $34,000 (or married and make more than $44,000), 85% of your benefits could be taxed.

If your disability benefits are subject to taxation because your income is above these limits, your disability benefits would be taxed at your marginal tax rate. In other words, you would not pay taxes of 50% or 85% of your benefits, you would probably pay taxes of about 10-15% on 50%-85% of your benefits. Higher income people might pay taxes of 33-35% on 85% of their benefits.

Maryland does not tax social security disability payments.

Disability Pensions

If you retired on disability, you must include in income any disability pension you receive under a plan that is paid for by your employer. This usually applies to state employees or local government employees. You must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A, until you reach minimum retirement age. Minimum retirement age generally is the age at which you can first receive a pension or annuity if you’re not disabled.

You may be entitled to a tax credit meaning some or all of the disability retirement benefits may not be taxable) if you were permanently and totally disabled when you retired. In order to avoid some or all of the tax on disability retirement you must meet the following tests.

You are a qualified individual for this credit if you are a U.S. citizen or resident alien, and either of the following applies.

  1. You were age 65 or older at the end of 2016.
  2. You were under age 65 and all three of the following statements are true.
    1. You retired on permanent and total disability.
    2. You received taxable disability income .
    3. You had not reached mandatory retirement age

You must be a U.S. citizen or resident alien (or be treated as a resident alien) to take the credit. Generally, you can’t take the credit if you were a nonresident alien at any time during the tax year. If you are under age 65 , you can qualify for the credit only if you are retired on permanent and total disability. Ypu are retired on permanent and total disability if:

  • You were permanently and totally disabled when you retired, and
  • You retired on disability before the close of the tax year.

Even if you don’t retire formally, you may be considered retired on disability when you have stopped working because of your disability.

Permanent and total disability.

You have a permanent and total disability if you can’t engage in any substantial gainful activity because of your physical or mental condition. A qualified physician must certify that the condition has lasted or can be expected to last continuously for 12 months or more, or that the condition can be expected to result in death..

Substantial gainful activity.

Substantial gainful activity is the performance of significant duties over a reasonable period of time while working for pay or profit, or in work generally done for pay or profit. Full-time work (or part-time work done at your employer’s convenience) in a competitive work situation for at least the minimum wage conclusively shows that you are able to engage in substantial gainful activity.

Disability income.

If you are under age 65, you must also have taxable disability income to qualify for the credit. Disability income must meet both of the following requirements.

  1. It must be paid under your employer’s accident or health plan or pension plan.
  2. It must be included in your income as wages (or payments instead of wages) for the time you are absent from work because of permanent and total disability.

Payments that aren’t disability income.

Any payment you receive from a plan that doesn’t provide for disability retirement isn’t disability income. Any lump-sum payment for accrued annual leave that you receive when you retire on disability is a salary payment and isn’t disability income.

For purposes of the credit for the elderly or the disabled, disability income doesn’t include amounts you receive after you reach mandatory retirement age. Mandatory retirement age is the age set by your employer at which you would have had to retire, had you not become disabled.

To determine if you can claim the credit, you must consider two income limits. The first limit is the amount of your adjusted gross income (AGI). The second limit is the amount of nontaxable social security and other nontaxable pensions, annuities, or disability income you received.

If your AGI and your nontaxable pensions, annuities, or disability income are less than the income limits, you may be able to claim the credit., later.

Table 1. Income Limits
IF your filing status is…THEN, even if you qualify (see Figure A), you CAN’T take the credit if…
Your adjusted gross income (AGI)* is equal to or more than…OR the total of your nontaxable social security and other nontaxable pension(s), annuities, or disability income is equal to or more than…
single, head of household, or qualifying widow(er) with dependent child$17,500$5,000
married filing jointly and only one spouse qualifies in Figure A$20,000$5,000
married filing jointly and both spouses qualify in Figure A$25,000$7,500
married filing separately and you lived apart from your spouse for all of 2016$12,500

 

Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. Report the payments on lines 16a and 16b of Form 1040 or on lines 12a and 12b of Form 1040A.

If you receive payments from a retirement or profit-sharing plan that doesn’t provide for disability retirement, don’t treat the payments as a disability pension. The payments must be reported as a pension or annuity.

Federal Employees’ Compensation Act (FECA).

Payments received under this Act for personal injury or sickness, including payments to beneficiaries in case of death, aren’t taxable. However, you’re taxed on amounts you receive under this Act as continuation of pay for up to 45 days while a claim is being decided. Report this income as wages. Also, pay for sick leave while a claim is being processed is taxable and must be included in your income as wages.

If part of the payments you receive under FECA reduces your social security or equivalent railroad retirement benefits received, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable. See Pub. 554 for more information.

You can deduct the amount you spend to buy back sick leave for an earlier year to be eligible for nontaxable FECA benefits for that period. It’s a miscellaneous deduction subject to the 2%-of-AGI limit on Schedule A (Form 1040). If you buy back sick leave in the same year you used it, the amount reduces your taxable sick leave pay. Don’t deduct it separately.

Benefits you receive under an accident or health insurance policy on which either you paid the premiums or your employer paid the premiums but you had to include them in your income.

Disability benefits you receive for loss of income or earning capacity as a result of injuries at work under a no-fault car insurance policy are not taxable

Compensation under a health or accident plan paid for by your employer you receive for permanent loss or loss of use of a part or function of your body, or for your permanent disfigurement are not taxable. This compensation must be based only on the injury and not on the period of your absence from work. These benefits aren’t taxable even if your employer pays for the accident and health plan that provides these benefits.

Reimbursement for medical care.

A reimbursement for medical care is generally not taxable. However, it may reduce your medical expense deduction.

Sickness and injury benefits

This section discusses sickness and injury benefits including disability pensions, long-term care insurance contracts, workers’ compensation, and other benefits.

In most cases, you must report as income any amount you receive for personal injury or sickness through an accident or health plan that is paid for by your employer. If both you and your employer pay for the plan, only the amount you receive that is due to your employer’s payments is reported as income. However, certain payments may not be taxable to you. Your employer should be able to give you specific details about your pension plan and tell you the amount you paid for your disability pension. In addition to disability pensions and annuities, you may be receiving other payments for sickness and injury.

If you pay the entire cost of a health or accident insurance plan, don’t include any amounts you receive from the plan for personal injury or sickness as income on your tax return.

Cafeteria plans.

In most cases, if you’re covered by an accident or health insurance plan through a cafeteria plan, and the amount of the insurance premiums wasn’t included in your income, you aren’t considered to have paid the premiums and you must include any benefits you receive in your income. If the amount of the premiums was included in your income, you’re considered to have paid the premiums, and any benefits you receive aren’t taxable.

Military and Government Disability Pensions

Certain military and government disability pensions aren’t taxable.

Service-connected disability.

You may be able to exclude from income amounts you receive as a pension, annuity, or similar allowance for personal injury or sickness resulting from active service in one of the following government services.

The armed forces of any country.

The National Oceanic and Atmospheric Administration.

The Public Health Service.

The Foreign Service.

Conditions for exclusion.

Don’t include the disability payments in your income if any of the following conditions apply.

You were entitled to receive a disability payment before September 25, 1975.

You were a member of a listed government service or its reserve component, or were under a binding written commitment to become a member, on September 24, 1975.

You receive the disability payments for a combat-related injury. This is a personal injury or sickness that:

Results directly from armed conflict,

Takes place while you’re engaged in extra-hazardous service,

Takes place under conditions simulating war, including training exercises such as maneuvers, or

Is caused by an instrumentality of war.

You would be entitled to receive disability compensation from the Department of Veterans Affairs (VA) if you filed an application for it. Your exclusion under this condition is equal to the amount you would be entitled to receive from the VA.

Retroactive VA determination.

If you retire from the armed services based on years of service and are later given a retroactive service-connected disability rating by the VA, your retirement pay for the retroactive period is excluded from income up to the amount of VA disability benefits you would have been entitled to receive. You

can claim a refund of any tax paid on the excludable amount (subject to the statute of limitations) by filing an amended return on Form 1040X for each previous year during the retroactive period. You must include with each Form 1040X a copy of the official VA Determination letter granting the retroactive benefit. The letter must show the amount withheld and the effective date of the benefit.

If you receive a lump-sum disability severance payment and are later awarded VA disability benefits, exclude 100% of the severance benefit from your income. However, you must include in your income any lump-sum readjustment or other nondisability severance payment you received on release from active duty, even if you’re later given a retroactive disability rating by the VA.

Long-Term Care Insurance Contracts

Long-term care insurance contracts in most cases are treated as accident and health insurance contracts. Amounts you receive from them (other than policyholder dividends or premium refunds) in most cases are excludable from income as amounts received for personal injury or sickness. To claim an exclusion for payments made on a per diem or other periodic basis under a long-term care insurance contract, you must file Form 8853 with your return.

A long-term care insurance contract is an insurance contract that only provides coverage for qualified long-term care services. The contract must:

Be guaranteed renewable;

Not provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed;

Provide that refunds, other than refunds on the death of the insured or complete surrender or cancellation of the contract, and dividends under the contract, may only be used to reduce future premiums or increase future benefits; and

In most cases, not pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare, except where Medicare is a secondary payer or the contract makes per diem or other periodic payments without regard to expenses.

Qualified long-term care services.

Qualified long-term care services are:

Necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance and personal care services; and

Required by a chronically ill individual and provided pursuant to a plan of care prescribed by a licensed health care practitioner.

Chronically ill individual.

A chronically ill individual is one who has been certified by a licensed health care practitioner within the previous 12 months as one of the following.

An individual who, for at least 90 days, is unable to perform at least two activities of daily living without substantial assistance due to loss of functional capacity. Activities of daily living are eating, toileting, transferring, bathing, dressing, and continence.

An individual who requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.

Limit on exclusion.

You generally can exclude from gross income up to $340 a day for 2016. See Limit on exclusion, under Long-Term Care Insurance Contracts, under Sickness and Injury Benefits in Pub. 525 for more information.

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