Sickness and Injury Benefits
Benefits you receive due to sickness or injury may be taxable or non-taxable depending on the circumstances. These benefits include:
- Disability pensions
- Long-term care insurance contracts
- Workers' compensation
The taxable portion of disability income or pensions are reported on Line 7
of your 1040
until you reach minimum retirement age. The day after you reach minimum retirement age, your disability pension is taxable as a pension or annuity.
Disability Income: If you receive income for personal injury or sickness, the income is taxable if your employer paid the cost of the premiums for the coverage. If you paid the cost for the disability income coverage, the payments are not taxable to you. If you and your employer both contributed to the payment of the coverage, a portion of the income will be taxable.
Cafeteria plans: If you are covered by an accident or health insurance plan as a part of a cafeteria plan and the premiums were not included in your income, you are not considered to have made the payments, and the income is taxable.
Retirement and profit sharing plans: If you receive payments from a retirement or profit sharing plan that does not include disability benefits, these payments are not considered disability income and are reported as pension or annuity income.
Accrued leave payment: If you retire on disability and receive a lump-sum payment for accrued leave this is considered a salary payment, subject to income tax. It should be included on your W-2
Military and government disability pensions: If you receive a pension or annuity for personal injury or sickness resulting from active service in
- The armed services of any country
- The National Oceanic and Atmospheric Administration
- The Public Health Service, or
- The Foreign Service
you may be able to exclude the income from taxation. If you meet any of the following conditions, the income from these pensions is excluded from taxation:
Long-Term Care Insurance Contracts
- You were entitled to receive a disability pension payment before September 25, 1975,
- You were a member of a listed government service or its reserve component on September 24, 1975,
- You receive the disability payments for a combat-related injury. This is a personal injury or sickness that 1) results directly from armed conflict, 2) takes place while you are engaged in extra-hazardous service, 3) takes place under situations simulating war, or 4) is caused by an instrumentality of war.
- You would be entitled to receive disability compensation from the Department of Veterans Affairs if you filed an application for it.
Long-term care insurance contracts are usually treated as accident and health insurance contracts. Amounts received under these policies are not taxable income up to $240 per day. A long-term care insurance contract is defined as one that must:
- Be guaranteed renewable
- Not provide a cash surrender value or other money that can be paid, assigned, pledged, or borrowed
- Provide that refunds (other than refunds on the death of the insured or complete surrender of the policy) and dividends may be used only to reduce future premiums or increase future benefits
- Generally not pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare where Medicare is the secondary payer; or if the contract makes per diem or other periodic payments without regard to expenses.
Amounts you receive as workers' compensation for a work-related injury or illness are fully exempt from tax if paid under a workers' compensation act or statute. The exemption also applies to your survivors.
Other Sickness and Injury Benefits
Railroad sick pay payments you receive under the Railroad Unemployment Insurance Act are taxable unless they are for a work related injury.
Federal Employees' Compensation Act Payments received under this act are not taxable. However, you are taxed on pay continuation benefits for up to 45 days while your claim is being decided.
Compensatory damages received for physical injury or illness are not taxable.
Benefits you receive under an accident or health insurance policy are not taxable if you paid the premiums or your employer included the premiums in your income.
Disability Benefits under a no-fault car insurance policy received for loss of income or earning capacity due to an injury are not taxable.
Loss of Function Compensation you receive for permanent loss of use of a part or function of your body, or for permanent disfigurement are not taxable.
Reimbursements for medical care are not taxable, but may reduce your medical expense deduction.