Are My Workers’ Compensation Benefits Tax Deductible?

According to the Internal Revenue Service generally speaking workers’ compensation benefits are not taxable.  This includes temporary total disability benefits, permanent partial disability benefits and permanent total disability benefits.  However nothing is easy with the IRS as it notes that if Social Security benefits are involved, your workers’ compensation benefits may be taxed.

The bottom line is to call our office if you have any questions as to whether or not your benefits are taxable.  If necessary you may need to consult an accountant to verify, but we can certainly start the discussion for you.

See below for an excerpt from IRS Publication 525 discussing how the IRS treats workers’ compensation benefits.

Publication 525

Cat. No. 15047D

Taxable and Nontaxable Income

For use in preparing 2012 Returns


Workers’ Compensation

Amounts you receive as workers’ compensation for an occupational sickness or injury are fully exempt from tax if they are paid under a workers’ compensation act or a statute in the nature of a workers’ compensation act. The exemption also applies to your survivors. The exemption, however, 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 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  Other Income under Miscellaneous Income, later.

Return to work. If you return to work after qualifying for workers’ compensation, salary payments you receive for performing light du­ties are taxable as wages.

Contact Putnam Law Offices for further help.

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