Navigating Stimulus Checks After a Workers’ Compensation Settlement: What You Need to Know

The road to recovery after a workplace injury is often fraught with physical, emotional, and financial challenges. When you finally reach a Workers’ Compensation (WC) settlement, it represents a significant step towards closure and financial stability. However, the unexpected arrival of federal stimulus checks during the COVID-19 pandemic added another layer of questions for many: "Will my Workers’ Comp settlement affect my eligibility for a stimulus check? Do I still qualify, or will it count against me?"

This article aims to provide clarity and reassurance to individuals who have received or are expecting a Workers’ Compensation settlement, shedding light on how these payments interact with federal stimulus checks (officially known as Economic Impact Payments, or EIPs). We’ll delve into the specifics of eligibility, the role of Adjusted Gross Income (AGI), and what your WC settlement means for your right to this crucial financial relief.

Understanding the Stimulus Checks: A Brief Overview

Before diving into the specifics of Workers’ Comp, it’s essential to understand the basic framework of the stimulus checks. The U.S. government issued several rounds of Economic Impact Payments to provide financial relief to Americans during the economic disruption caused by the COVID-19 pandemic. These payments were primarily authorized by:

1. The CARES Act (March 2020): Provided up to $1,200 per eligible adult and $500 per qualifying child.
2. The Consolidated Appropriations Act (December 2020): Provided up to $600 per eligible adult and $600 per qualifying child.
3. The American Rescue Plan Act (March 2021): Provided up to $1,400 per eligible adult and $1,400 per qualifying child.

Key Eligibility Factors:

While the amounts and specific rules varied slightly between rounds, the core eligibility criteria revolved around:

• Adjusted Gross Income (AGI): This was the primary determinant. Payments generally phased out for higher earners.
• Filing Status: Single, Married Filing Jointly, Head of Household.
• Dependents: Eligibility for additional payments for qualifying children.
• Social Security Number (SSN): Generally required for the taxpayer and dependents.
• Residency: U.S. citizen or resident alien.

Most eligible individuals received their payments automatically via direct deposit, check, or debit card based on their most recently filed tax return (typically 2019 or 2020). For those who didn’t file taxes but received federal benefits (like Social Security, SSDI, SSI, or VA benefits), the IRS often sent payments automatically based on information from those agencies.

The Crucial Intersection: Workers’ Comp Settlements and Stimulus Eligibility

This is the central question for many: Does a Workers’ Compensation settlement count as income that would reduce or eliminate my stimulus check eligibility?

The short answer, for the vast majority of cases, is reassuring: a Workers’ Compensation settlement itself typically does not count as taxable income for the purpose of calculating your Adjusted Gross Income (AGI), which is the primary determinant for stimulus check eligibility.

This is a critical distinction and a significant relief for injured workers. The IRS generally views Workers’ Compensation benefits, including lump-sum settlements, as compensation for personal physical injuries or sickness, or for lost wages due to such injuries. Under federal tax law, these types of payments are generally excluded from gross income.

Why This Matters for Stimulus Checks:

Since stimulus checks were primarily based on your AGI from a prior tax year (usually 2019 or 2020), if your Workers’ Comp settlement does not contribute to your AGI, it will not negatively impact your eligibility for the stimulus payment. Your qualification will instead depend on any other sources of income you had in that relevant tax year.

Dissecting Workers’ Compensation Settlements

To fully grasp why WC settlements are typically excluded, let’s briefly look at their components:

• Medical Benefits: Payments for medical treatment, prescriptions, rehabilitation, and related expenses are always non-taxable.
• Temporary Disability Benefits (TTD): Payments for lost wages while you are temporarily unable to work due to your injury. These are generally not taxable at the federal level, though some states may have specific rules for state income tax (which doesn’t impact federal AGI for EIP purposes).
• Permanent Partial Disability (PPD) or Permanent Total Disability (PTD): Compensation for the permanent impairment or loss of earning capacity resulting from your injury. These are generally non-taxable.
• Lump Sum Settlements: Often a combination of the above, settling all future medical and indemnity (wage loss) benefits. As long as the settlement is for a physical injury or sickness, or for lost wages directly resulting from such an injury, it remains non-taxable for federal income tax purposes.
• Structured Settlements: Where the settlement is paid out over time rather than in one lump sum. The same tax rules apply; the periodic payments remain non-taxable for federal income tax purposes.

Important Note: The general rule applies to payments for physical injuries or sickness. If a Workers’ Comp settlement includes elements for emotional distress not directly related to a physical injury, or for punitive damages (which are rare in WC), those specific portions could potentially be taxable. However, the vast majority of WC settlements fall under the non-taxable umbrella.

AGI: The Linchpin of Eligibility Explained

Your Adjusted Gross Income (AGI) is a crucial figure on your tax return. It’s calculated by taking your gross income (all the money you earned) and subtracting certain "above-the-line" deductions, such as contributions to a traditional IRA, student loan interest, or health savings account (HSA) contributions.

The IRS used your AGI from your most recent tax filing (either 2019 or 2020) to determine your stimulus check eligibility and amount.

How Workers’ Comp Impacts AGI (or Doesn’t):

Because Workers’ Compensation payments are generally excluded from your gross income, they do not contribute to your AGI. This means that even if you received a substantial WC settlement, it would not, by itself, push your AGI above the stimulus check income thresholds.

What DOES Count Towards AGI (and thus stimulus eligibility):

• Wages, salaries, and tips from employment
• Net earnings from self-employment
• Taxable interest and dividends
• Taxable refunds, credits, or offsets of state and local income taxes
• Alimony received (for divorce agreements before 2019)
• Business income or loss
• Capital gains or losses
• Other taxable gains
• Taxable IRA distributions
• Pensions and annuities
• Rental real estate, royalties, partnerships, S corporations, trusts, etc.
• Unemployment compensation
• Taxable Social Security benefits (if your income is above a certain threshold)

If your AGI from these other sources was below the relevant thresholds for each stimulus round, you were eligible for the full payment. If your AGI was above the threshold, your payment might have been reduced or phased out entirely.

Common Scenarios for WC Recipients and Stimulus Checks

Let’s look at a few typical situations:

1. You Only Had Workers’ Comp Income (and no other significant income) in the Relevant Tax Year:

   • Outcome: You were very likely eligible for the full stimulus payment(s). Since your WC settlement didn’t count as taxable income, your AGI would have been low (potentially $0 or very close to it), placing you well within the eligibility limits.
   • Action: If you didn’t file taxes because your income was below the filing threshold, but you qualified for a stimulus check, you might have needed to use the IRS’s "Non-Filers Tool" (for the first payment) or file a simplified tax return (for later payments or to claim a Recovery Rebate Credit).

2. You Had Workers’ Comp Income PLUS Other Taxable Income (e.g., part-time work, SSDI, pension) in the Relevant Tax Year:

   • Outcome: Your eligibility for the stimulus check would depend solely on your AGI from your other taxable income sources. The WC settlement would not be factored in.
   • Action: Ensure your tax return accurately reflects your taxable income and properly excludes your WC settlement.

3. You Were Receiving Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) Alongside Workers’ Comp:

   • Outcome: For the first two stimulus payments, many SSDI and SSI recipients received their payments automatically, even if they didn’t file a tax return. The IRS worked with the Social Security Administration (SSA) to get payment information. For the third payment, this process continued. Your Workers’ Comp settlement would not generally affect this automatic payment process because it doesn’t change your SSDI/SSI benefit amount (though WC can impact future SSI eligibility due to resource limits, this is separate from stimulus checks).

4. Your AGI in the "Lookback Year" (e.g., 2019) Was High, But It Dropped Significantly Due to Your Injury and WC in a Later Year (e.g., 2020 or 2021):

   • Outcome: If your AGI for the year the stimulus was based on (e.g., 2019) was too high, but your AGI in the year you received the stimulus (e.g., 2020 or 2021) was lower due to your injury and reduced work, you might be eligible for a "Recovery Rebate Credit" when you file your next tax return.
   • Action: When you file your 2020 or 2021 tax return, the IRS form will ask about your stimulus payments. If you didn’t receive the full amount you were entitled to based on your actual AGI for that tax year, you can claim the difference as a refundable tax credit. This is particularly important for individuals whose income drastically changed due to an injury.

What to Do If You Didn’t Receive Your Stimulus Payment (or received less)

If you believe you were eligible for a stimulus check but didn’t receive it, or received less than you were due, here are the steps to take:

1. Check Your IRS Account: Use the IRS "Get My Payment" tool (if still active for that round) or create an IRS online account to view your tax records and stimulus payment history.
2. Review Your Tax Returns: Double-check the AGI on your 2019 or 2020 tax return (whichever was used by the IRS) to ensure it was below the thresholds. Make sure your Workers’ Comp settlement was not mistakenly included in your taxable income.
3. File a Tax Return (or Amend):
   • For the First Two Payments (2020 Tax Return): If you didn’t receive the first or second EIP, you could claim the "Recovery Rebate Credit" on your 2020 federal income tax return. Even if you don’t normally file, you might need to file a 2020 return to claim this credit.
   • For the Third Payment (2021 Tax Return): Similarly, if you didn’t receive the third EIP, you can claim the "Recovery Rebate Credit" on your 2021 federal income tax return.
   • Amend if Necessary: If you mistakenly included your WC settlement as taxable income on a prior return, you might consider amending that return (Form 1040-X) to correct your AGI, though this is less likely to be necessary solely for stimulus eligibility unless it significantly altered your AGI.
4. Contact the IRS: If you’ve exhausted other options and still have questions, you can try contacting the IRS directly. Be prepared for potentially long wait times.
5. Seek Professional Advice: Consider consulting with a tax professional, a Certified Public Accountant (CPA), or an enrolled agent. They can review your specific situation, help you file or amend returns, and ensure you claim any credits you are due.

Important Considerations and Caveats

• State-Specific Tax Rules: While Workers’ Comp settlements are generally non-taxable for federal income tax purposes (and thus for federal stimulus eligibility), a very small number of states may have different rules regarding state income tax on certain WC benefits. However, this does not impact your federal AGI or federal stimulus eligibility.
• Impact on Other Benefits: It’s crucial to understand that while Workers’ Compensation settlements generally do not affect your federal stimulus checks, they can potentially impact eligibility for other government benefit programs, such as Supplemental Security Income (SSI) or Medicaid, due to resource limits. These are entirely separate programs with different rules than the federal stimulus payments. Always consult with an attorney or benefits specialist regarding the impact of your WC settlement on these other programs.
• Keep Excellent Records: Maintain thorough records of your Workers’ Compensation settlement documents, all correspondence from the IRS, and copies of your tax returns. This will be invaluable if you need to clarify your situation or claim credits.

Conclusion

For individuals navigating the complexities of a Workers’ Compensation settlement, the good news regarding federal stimulus checks is overwhelmingly positive. Your WC settlement, by its nature as compensation for injury or lost wages due to injury, is generally not considered taxable income for federal purposes and therefore does not negatively impact your Adjusted Gross Income (AGI) for stimulus check eligibility.

Your right to these crucial payments hinges on your other taxable income in the relevant tax years. If you believe you were eligible for a stimulus payment but didn’t receive it, or received less than you expected, remember that the "Recovery Rebate Credit" on your federal tax return is your primary mechanism to claim what you’re owed. Don’t hesitate to seek professional tax advice if your situation is complex or if you need assistance in filing for your rightful payment. You’ve endured enough; ensuring you receive the financial relief you’re entitled to is a vital step in your recovery journey.