It’s tax season. Time to talk about a question I am asked in every single case: are Longshore or Defense Base Act workers’ compensation benefits taxable?
Take a look at IRS Publication 525, which discusses taxable and nontaxable income. On page 19, you will see a section titled, “Workers’ Compensation.” It says:
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 benefits you receive based on your age, length of service, or prior contributions to the plan, even if you retired because of an occupational illness 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 may be taxable. See Pub. 554 for more information.
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.
Disability pension. 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.
IRS Publication 525 interprets 26 U.S.C. § 104, entitled “Compensation for injuries or sickness.” Section 104 states:
(a) In General. Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include–
(1) amounts received under workmen’s compensation acts as compensation for personal injuries or sickness;
(2) the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness;
So, the answer to the workers’ compensation taxation question is: it depends. Pure workers’ compensation benefits, including Longshore and Defense Base Act benefits, are tax exempt. But, if the claimant’s workers’ compensation reduced their Social Security disability payments, then the amount of the reduction may be taxable. In other words, suppose that the claimant’s workers’ compensation rate is high enough to reduce their Social Security disability or Supplemental Security Income by $250. If that happens, then $250 of the workers compensation benefits then becomes taxable. Something to consider when dealing with a claim involving both workers’ compensation and Social Security.
Of course, consult a tax professional for more information.
Attribution: Photo courtesy of Flickr user Simon Cunningham and lendingmemo.com.
