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Language in workplace injury awards may affect tax liability

When you have been awarded compensation as the result of a workplace injury in Ohio, you probably need every penny to support yourself while you are out of work, but depending on the language used in the award, you may find yourself in debt to the Internal Revenue Service.

For example, a recent workers' compensation claim involved a college professor who sued her employer after she was demoted for reporting missing equipment. Her employment situation continued to sour and she was diagnosed with depression and post-traumatic stress disorder, among other psychological disorders. In addition to her workers' compensation claim, she filed an action for gross negligence against her employer.  The case was eventually settled.

The settlement agreement in the negligence case contained language that stated the compensation paid was for "emotional distress damages only." The U.S. Tax Court has now ruled that the compensation is taxable, because the language fails to show that the  emotional distress was a direct cause of work-related physical injuries.

While workers' compensation benefits are generally excluded from taxable income, awards stemming from legal settlements may sometimes be included in taxable gross income. The court will usually use the language of the agreement to determine how an award should be regarded in a tax context, as has been done in this case. The taxpayer who benefitted from the award, i.e., the injured worker, carries the burden to prove that the language should be interpreted differently.

This case demonstrates the importance of having an experienced attorney who understands the nature of workers' compensation and workplace injury issues. Whether your claim is only for workers' compensation or includes additional claims against your employer, the language used in filing claims, and in drafting settlements, is crucial to receiving the maximum benefits.   

Source: Huffington Post, "Litigation Settlements Must Consider Taxation," Brad Reid, Jan. 14, 2014

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