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Workers' compensation and the taxman: Are benefits taxable?

For many Colorado families, the weeks leading up to April 15 can be very stressful. Of course, that day is noted as the deadline for filing their income tax returns. Knowing that this deadline is on the horizon, many people might be wondering what exactly they should consider taxable income.

For those who were injured on the job within the last year -- or even earlier -- and receive workers' compensation benefits, it may not be too clear how this income factors into tax filings. After all, receiving these benefits might represent all or a large share of a family's monthly income.

According to the Internal Revenue Service, workers' compensation benefits for a workplace injury or illness are not subject to taxation. This applies to all payments made under workers' compensation laws or arrangements designed to work in a similar fashion. It's worth noting that this tax exemption also applies to survivor benefits paid out in the wake of a fatal work-related accident.

For those who receive workers' compensation benefits, that financial support will obviously come as a relief. However, it can make a family's financial picture pretty tight. Since these benefits only represent a fraction of a person's income if he or she were able to work, it may be exceptionally important to capture the full amount that is disbursed.

Knowing that workers' compensation benefits are not subject to income taxes may come as a tremendous relief for Colorado residents completing their tax returns ahead of the deadline. This will allow individuals to spend important time focusing on recovery, rather than an undue -- and unexpected -- financial burden.

Source: The Internal Revenue Service, "Your Federal Income Tax -- Workers' compensation," accessed March 27, 2014

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Eley Law Firm
2000 S. Colorado Blvd. No. 2-740
Denver, CO 80222

Toll Free: 866-371-3322
Phone: 720-644-8759
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