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SSDI Fact Sheet
Case Studies
Tax CommentsA taxpayer may have to include from 50% to 85% of Social Security benefits in gross income [IRC Sec. 86]. The rule is the same for a Social Security Disability Benefit (SSD) as for Social Security retirement benefits. The amount of benefits that must be included in income depends on the amount of the taxpayer’s other income and the amount of the benefits themselves. However, none of the Social Security benefits must be included in income unless the taxpayer’s adjusted gross income plus one-half of his Social Security benefits exceed a specified base amount (generally $32,000 for taxpayers filing a joint return and $25,000 for most other taxpayers).

If an employee settles his workers’ compensation claim for cash, that settlement amount will not be reportable [IRC Sec.104 (a) 1]. However, any gain or interest that the employee earns from investing his workers’ compensation settlement will be reportable income. There may be an offset by SSD (see SSD Fact Sheet) and that would reduce the employee’s reportable income for the time of the offset.

It is probably tax-advantageous for the employee/claimant to settle his workers’ compensation claim by (1) obtaining his SSD award, (2) by eliminating the SSD offset, (3) by accepting tax-free structured settlement benefits [IRC Sec.104 (a) 1] and (4) by making sure that the closing papers are very specific on the allocation of the settlement for (a) wage benefits and (b) medical care benefits.