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Columns: Tax Talk
George Saenz, CPA Expert: George Saenz, CPA
Tax Talk
Workers' comp is usually tax-free
Tax Talk

Uncle Sam doesn't tax workers' comp

Dear Tax Talk:
If I receive a settlement payment from an insurance company due to a workers' compensation claim, is that type of income taxable either on a state or federal level? Or is that income considered "not earned" and therefore not taxable? The settlement looks to be in excess of $100,000.

Thank you.
-- Tracie

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Dear Tracie,
If you're injured at work, the tax law gives you a break. Workers' compensation benefits are intended to replace lost wages. Wages, of course, are taxable income. However, the workers' compensation is also intended to compensate you for injury, and payments for physical injuries are not taxable.

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

Bankrate.com's corrections policy-- Posted: Aug. 28, 2007
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