In California, most workers' compensation benefits are not taxed. The Internal Revenue Service (IRS) views these benefits as compensation for an individual's physical or mental inability to work, meaning that they are not considered taxable income. Therefore, if you live and work in California, workers' comp benefits that you receive will not be taxed at the state or federal level.
Income Compensation May Be Taxable
However, while workers' comp benefits are not subject to tax in California, this can change in certain circumstances. If an individual's workers' compensation settlement includes compensation for lost wages, this may be taxed as income. This is because lost wages are included in an employee's gross income.
Therefore, it’s always best to consult with an experienced workers’ compensation lawyer to understand how this works, as well as other potential tax implications that may apply to your specific case. A professional can guide you in making the right decisions when it comes to these complex tax laws.
You Still Need to Report Workers’ Comp Benefits
Additionally, it is also important to understand how to correctly report workers' comp benefits on your tax returns. Even though compensation may not be taxable at the federal and state levels, it still needs to be reported. This is because it can impact tax credits or other benefits that the taxpayer may be entitled to. Therefore, it’s crucial to ensure that all paperwork and documentation are correctly filed and recorded.
Also, there are deductions available for individuals who have incurred medical expenses due to their injury or illness. Some of the most common medical expenses that can be deducted include medical consultations, hospital fees, prescription drugs, and physical therapy. These deductions can help you reduce your taxable income, which is why it’s essential to keep track of these expenses.
Contact Smolich & Smolich for Legal Assistance
While there are exceptions for compensation related to income, net workers' compensation benefits in California are not taxed. That said, it’s always best to consult with a personal injury lawyer to understand the tax implications for your specific situation.
Smolich and Smolich can help. Contact us today to request a free consultation.