In the vast majority of cases, workers’ compensation benefits are fully tax exempt, at the federal, state and local level. But this is not always the case where the workers’ comp beneficiary is also receiving Social Security Disability Insurance (SSDI) benefits.

Workers’ comp programs, which are run at the state level, provide benefits to people who suffer from work-related disabilities, stemming either from specific incidents or from conditions that develop over time, otherwise known as occupational injuries. The federal SSDI program compensates people with sufficient work histories who are deemed unemployable due to their disabilities, regardless of any connection between the person’s employment and the disability.

As is the case whenever a person with Social Security benefits receives supplemental income, a person’s SSDI benefit becomes taxable if the combined SSDI and workers’ comp income exceeds $25,000 (or $35,000 for joint filers).

To further complicate matters, if the person’s combined income exceeds this, then the workers’ comp award may also become taxable where the person is subject to the workers’ comp offset. This rule exists to prevent a person from receiving a combined amount from SSDI and workers’ comp in excess of 80 percent of the person’s prior earnings. In such cases, the Social Security Administration will reduce the person’s SSDI benefit until it meets the 80 percent threshold.

However,…