Generally, you must
report as income any amount you receive for personal injury or
sickness through an accident or health plan that is paid for by your
employer. If both you and your employer pay for the plan, only the
amount you receive that is due to your employer's payments is reported
as income. However, certain payments may not be taxable to you. For
information on nontaxable payments, see Military and Government
Disability Pensions and Other Sickness and Injury Benefits,
later, in this discussion.
Cost paid by you.
If you pay the entire cost of an accident or health plan, do not
include any amounts you receive from the plan for personal injury or
sickness as income on your tax return. If your plan reimbursed you for
medical expenses you deducted in an earlier year, you may have to
include some, or all, of the reimbursement in your income. See
Generally, if you are covered by an accident or health insurance
plan through a cafeteria plan, and the amount of the insurance
premiums was not included in your income, you are not considered to
have paid the premiums and you must include any benefits you receive
in your income. If the amount of the premiums was included in your
income, you are considered to have paid the premiums and any benefits
you receive are not taxable.
If you retired on disability, you must include in income any
disability pension you receive under a plan that is paid for by your
employer. You must report your taxable disability payments as wages on
line 7 of Form 1040 or Form 1040A until you reach minimum retirement
age. Minimum retirement age generally is the age at which you can
first receive a pension or annuity if you are not disabled.
You may be entitled to a tax credit if you were permanently and
totally disabled when you retired. For information on this credit, see
Credit for the Elderly or the Disabled.
Beginning on the day after you reach minimum retirement age,
payments you receive are taxable as a pension or annuity. Report the
payments on lines 16a and 16b of Form 1040, or on lines 12a and 12b of
Form 1040A. For more information on pensions and annuities, get
Retirement and profit-sharing plans.
If you receive payments from a retirement or profit-sharing plan
that does not provide for disability retirement, do not treat the
payments as a disability pension. The payments must be reported as a
pension or annuity.
Accrued leave payment.
If you retire on disability, any lump-sum payment you receive for
accrued annual leave is a salary payment. The payment is not a
disability payment. Include it in your income in the tax year you
Military and Government
Certain military and government disability pensions are not
You may be able to exclude from income amounts you receive as a
pension, annuity, or similar allowance for personal injury or sickness
resulting from active service in one of the following government
- The armed forces of any country.
- The National Oceanic and Atmospheric Administration.
- The Public Health Service.
- The Foreign Service.
Conditions for exclusion.
Do not include the disability payments in your income if any of the
following conditions apply.
- You were entitled to receive a disability payment before
September 25, 1975.
- You were a member of a listed government service or its
reserve component, or were under a binding written commitment to
become a member, on September 24, 1975.
- You receive the disability payments for a combat-related
injury. This is a personal injury or sickness that:
- Results directly from armed conflict,
- Takes place while you are engaged in extra-hazardous
- Takes place under conditions simulating war, including
training exercises such as maneuvers, or
- Is caused by an instrumentality of war.
- You would be entitled to receive disability compensation
from the Department of Veterans Affairs (VA) if you filed an
application for it. Your exclusion under this condition is equal to
the amount you would be entitled to receive from the VA.
Pension based on years of service.
If you receive a disability pension based on years of service, you
generally must include it in your income. But if it is a result of
active service in one of the listed government services and one of the
listed conditions applies, do not include in income the part of your
pension that you would have received if the pension had been based on
a percentage of disability. You must include the rest of your pension
in your income.
Retroactive VA determination.
If you retire from the armed services based on years of service and
are later given a retroactive service-connected disability rating by
the VA, your retirement pay for the retroactive period is excluded
from income up to the amount of VA disability benefits you would have
been entitled to receive. You can claim a refund of any tax paid on
the excludable amount (subject to the statute of limitations) by
filing an amended return on Form 1040X for each previous year during
the retroactive period.
If you receive a lump-sum disability severance payment and are
later awarded VA disability benefits, do not include in your income
the portion of the severance payment equal to the VA benefit you would
have been entitled to receive in that same year. However, you must
include in your income any lump-sum readjustment or other
nondisability severance payment you received on release from active
duty, even if you are later given a retroactive disability rating by
Do not include in your income disability payments you receive for
injuries resulting directly from a violent attack that occurs while
you are a U.S. government employee performing official duties outside
the United States. For your disability payments to be tax exempt, the
Secretary of State must determine the attack was a terrorist attack.
Long-term care insurance contracts are generally
treated as accident and health insurance contracts. Amounts you
receive from them (other than policyholder dividends or premium
refunds) generally are excludable from income as amounts received for
personal injury or sickness. To claim an exclusion for payments made
on a per diem or other periodic basis under a long-term care insurance
contract, you must file Form 8853 with your return.
A long-term care insurance contract is any insurance contract that
only provides coverage for qualified long-term care services. The
- Must be guaranteed renewable,
- Must not provide for a cash surrender value or other money
that can be paid, assigned, pledged, or borrowed,
- Must provide that refunds, other than refunds on the death
of the insured or complete surrender or cancellation of the contract,
and dividends under the contract may be used only to reduce future
premiums or increase future benefits, and
- Generally must not pay or reimburse expenses incurred for
services or items that would be reimbursed under Medicare, except
where Medicare is a secondary payer or the contract makes per diem or
other periodic payments without regard to expenses.
Qualified long-term care services.
Qualified long-term care services are:
- Necessary diagnostic, preventive, therapeutic, curing,
treating, mitigating, and rehabilitative services, and
- Maintenance or personal care services required by a
chronically ill individual as prescribed by a licensed health care
Chronically ill individual.
A chronically ill individual is one who has been certified as one
of the following.
- An individual who, for at least 90 days, is unable to
perform at least two activities of daily living without substantial
assistance due to loss of functional capacity. Activities of daily
living are eating, toileting, transferring, bathing, dressing, and
- An individual who requires substantial supervision to be
protected from threats to health and safety due to severe cognitive
The certification must have been made by a licensed health care
practitioner within the previous 12 months.
Limit on exclusion.
The exclusion for payments made on a per diem or other periodic
basis under a long-term care insurance contract is subject to a limit.
The limit applies to the total of these payments and any accelerated
death benefits made on a per diem or other periodic basis under a life
insurance contract because the insured is chronically ill. (For more
information on accelerated death benefits, see Life Insurance
Proceeds under Miscellaneous Income, later.)
Under this limit, the excludable amount for any period is figured
by subtracting any reimbursement received (through insurance or
otherwise) for the cost of qualified long-term care services during
the period from the larger of the following amounts.
- The cost of qualified long-term care services during the
- The dollar amount for the period ($190 per day for any
period in 2000).
See section C of Form 8853 and its instructions for more
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
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
Return to work.
If you return to work after qualifying for workers' compensation,
payments you continue to receive while assigned to light duties are
taxable. Report these payments as wages on line 7 of Form 1040 or Form
1040A, or on line 1 of Form 1040EZ.
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
and Injury Benefits
In addition to disability pensions and annuities, you may receive
other payments for sickness or injury.
Railroad sick pay.
Payments you receive as sick pay under the Railroad Unemployment
Insurance Act are taxable and you must include them in your income.
However, do not include them in your income if they are for an
Black lung benefit payments.
These payments are similar to workers' compensation and generally
are not taxable.
Federal Employees' Compensation Act (FECA).
Payments received under this Act for personal injury or sickness,
including payments to beneficiaries in case of death, are not taxable.
However, you are taxed on amounts you receive under this Act as
"continuation of pay" for up to 45 days while a claim is being
decided. Report this income on line 7 of Form 1040 or Form 1040A, or
on line 1 of Form 1040EZ. Also, pay for sick leave while a claim is
being processed is taxable and must be included in your income as
You can deduct the amount you spend to "buy back" sick leave
for an earlier year to be eligible for nontaxable FECA benefits for
that period. It is a miscellaneous deduction subject to the 2% limit
on Schedule A (Form 1040). If you buy back sick leave in the same year
you used it, the amount reduces your taxable sick leave pay. Do not
deduct it separately.
Many other amounts you receive as compensation for sickness or
injury are not taxable. These include the following amounts.
- Compensatory damages you receive for physical injury or
physical sickness, whether paid in a lump sum or in periodic payments.
In the discussion Miscellaneous Income, later, see
Court awards and damages under Other
- Benefits you receive under an accident or health insurance
policy on which either you paid the premiums or your employer paid the
premiums but you had to include them in your gross income.
- Disability benefits you receive for loss of income or
earning capacity as a result of injuries under a "no-fault" car
- Compensation you receive for permanent loss or loss of use
of a part or function of your body, or for your permanent
disfigurement. This compensation must be based only on the injury and
not on the period of your absence from work. These benefits are not
taxable even if your employer pays for the accident and health plan
that provides these benefits.
Reimbursement for medical care.
A reimbursement for medical care is generally not taxable. However,
it may reduce your medical expense deduction.
If you receive reimbursement for an expense you deducted in an
earlier year, see Recoveries, later.
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