A 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.

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