April 28, 2023 2:42 am

Disability Benefits May Be Tax-Free Workers’ Compensation

That’s what happened to a state employee who suffered a work-related injury. She applied for disability retirement due to her injury and a state board approved her service-related disability retirement. She initially included the payments as income, but sued in a federal district court to obtain a refund on the grounds that the payments were in the nature of workers’ compensation. The IRS opposed her position,

The court ruled in her favor (Diane Kiczuk DC CT, 3/31/23). Code Sec. 104(a) excludes from taxable income amounts received by an employee “under a statute in the nature of a workmen’s compensation act.” Here, the court ruled that the payments were made to her under a state statute (Connecticut Gen Stat. Sec. 5-192p) that was “in the nature of workers’ compensation.” She received the benefits because of a work-related injury, so her refund was allowed.

Tax Glossary

Cash method of accounting

Reporting income when actually or constructively received and deducting expenses when paid. Certain businesses may not use the cash method.

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