This section discusses sickness and injury benefits including disability pensions, long-term care insurance contracts, workers' compensation, and other benefits.taxmap/pub17/p17-027.htm#en_us_publink100032532
Generally, if you retire on disability, you must report your pension or annuity as income.
You may be entitled to a tax credit if you were permanently and totally disabled when you retired. For information on this credit and the definition of permanent and total disability, see chapter 33
For information on disability payments from a governmental program provided as a substitute for unemployment compensation, see chapter 12
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. Your employer should be able to give you specific details about your pension plan and tell you the amount you paid for your disability pension. In addition to disability pensions and annuities, you may be receiving other payments for sickness and injury.
Do not report as income any amounts paid to reimburse you for medical expenses you incurred after the plan was established.
If you pay the entire cost of a health or accident insurance 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 Reimbursement in a later year
in chapter 21.
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. taxmap/pub17/p17-027.htm#en_us_publink100032538
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. For more information on pensions, see chapter 10
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 receive it. taxmap/pub17/p17-027.htm#en_us_publink100032540
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.
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. The rules for reporting pensions are explained in How To Report
in chapter 10.
Certain military and government disability pensions are not taxable.taxmap/pub17/p17-027.htm#en_us_publink100032542
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 services.
- The armed forces of any country.
- The National Oceanic and Atmospheric Administration.
- The Public Health Service.
- The Foreign Service.
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 service,
- 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.
If you receive a disability pension based on years of service, you generally must include it in your income. However, if the pension qualifies for the exclusion for a service-connected disability (discussed earlier), 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. taxmap/pub17/p17-027.htm#en_us_publink100097410
Disability benefits you receive from the VA are not included in your income. If you are a military retiree and you receive disability benefits from other than the VA, do not include in your income the amount of disability benefits equal to the VA benefits to which you are entitled. taxmap/pub17/p17-027.htm#en_us_publink100032545
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, exclude 100% of the severance benefit from your income. 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 the VA. taxmap/pub17/p17-027.htm#en_us_publink100091159
Generally, under the statute of limitations a claim for credit or refund must be filed within 3 years from the time a return was filed. However, if you receive a retroactive service-connected disability rating determination, the statute of limitations is extended by a 1-year period beginning on the date of the determination. This 1-year extended period applies to claims for credit or refund filed after June 17, 2008, and does not apply to any tax year that began more than 5 years before the date of the determination. taxmap/pub17/p17-027.htm#en_us_publink100091160
You retired in 2003 and receive a pension based on your years of service. On August 6, 2008, you receive a determination of service-connected disability retroactive to 2003. Generally, you could claim a refund for the taxes paid on your pension for 2005, 2006, and 2007. However, under the special limitation period, you can also file a claim for 2004 as long as you file the claim by August 6, 2009. You cannot file a claim for 2003 because that tax year began more than 5 years before the determination.
If you received a retroactive service-connected disability rating determination after December 31, 2000, and before June 17, 2008, you have 1 year from June 17, 2008, to file your claims. You cannot make any claims for tax years that began before 2001.
Do not include in your income disability payments you receive for injuries resulting directly from a terrorist or military action.taxmap/pub17/p17-027.htm#en_us_publink100032547
Long-term care insurance contracts generally are 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 an insurance contract that only provides coverage for qualified long-term care services. The contract must:
- Be guaranteed renewable,
- Not provide for 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 or cancellation of the contract, and dividends under the contract may be used only to reduce future premiums or increase future benefits, and
- Generally 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 are:
- Necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance and personal care services, and
- Required by a chronically ill individual and provided pursuant to a plan of care as prescribed by a licensed health care practitioner.
A chronically ill individual is one who has been certified by a licensed health care practitioner within the previous 12 months 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 continence.
- An individual who requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.
You generally can exclude from gross income up to $270 a day for 2008. See Limit on exclusion, under Long-Term Care Insurance Contracts, under Sickness and Injury Benefits in Publication 525 for more information. taxmap/pub17/p17-027.htm#en_us_publink100032551
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 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 and may be taxable. For more information, see Publication 915, Social Security and Equivalent Railroad Retirement Benefits.
If you return to work after qualifying for workers' compensation, salary payments you receive for performing light duties are taxable as wages.taxmap/pub17/p17-027.htm#en_us_publink100032554
In addition to disability pensions and annuities, you may receive other payments for sickness or injury.taxmap/pub17/p17-027.htm#en_us_publink100032555
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 on-the-job injury. taxmap/pub17/p17-027.htm#en_us_publink100032556
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 1040-EZ. Also, pay for sick leave while a claim is being processed is taxable and must be included in your income as wages.
If part of the payments you receive under FECA 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 Social security and equivalent railroad retirement benefits under Other Income, in Publication 525.
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%-of-AGI 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.taxmap/pub17/p17-027.htm#en_us_publink100032558
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.
- 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 income.
- Disability benefits you receive for loss of income or earning capacity as a result of injuries under a no-fault car insurance policy.
- 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.
A reimbursement for medical care is generally not taxable. However, it may reduce your medical expense deduction. For more information, see chapter 21