Amounts received as workers' compensation for an occupational sickness or injury are fully exempt from tax if paid under a workers' compensation act or a statute in the nature of a workers' compensation act.
This type of income is not included on your tax return using the TaxAct® program. If you have received an IRS Form W-2 Wage and Tax Statement for this income, you can use the workaround method outlined below.
To enter an adjustment to offset the W-2 income, if necessary:
This entry will result in an adjustment on Line 8 of Schedule 1 (Form 1040) Additional Income and Adjustments to Income. When the return is printed, a supporting details sheet will print with the description and amount to explain the adjustment.
The adjustment does not apply to retirement plan benefits you receive based on your age, length of service, or prior contributions to the plan, even if you retired because of an occupational sickness or injury.
If you return to work after qualifying for workers' compensation, payments you continue to receive while assigned to light duties are taxable. Report these payments as wages on Line 1 of Form 1040 U.S. Individual Income Tax Return.
If your disability pension is paid under a statute that provides benefits only to employees with service-connected disabilities, part of it may be workers' compensation. That part is exempt from tax. The rest of your pension, based on years of service, is taxable as pension or annuity income. If you die, the part of your survivors' benefit that is a continuation of the workers' compensation is exempt from tax.
Refer to IRS Publication 525 Taxable and Nontaxable Income for additional information.
CAUTION! If part of your workers' compensation reduces your social security or equivalent railroad retirement benefits received, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable. For a discussion of the taxability of these benefits, see page 29 of IRS Publication 525.
Note that any link in the information above is updated each year automatically and will take you to the most recent version of the document at the time it is accessed.