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.
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 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 Recoveries under Miscellaneous Income, later. taxmap/pubs/p525-003.htm#en_us_publink1000229313
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/pubs/p525-003.htm#en_us_publink1000229314
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 Publication 524, 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, see Publication 575. taxmap/pubs/p525-003.htm#en_us_publink1000229316
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. taxmap/pubs/p525-003.htm#en_us_publink1000229317
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/pubs/p525-003.htm#en_us_publink1000229318
Certain military and government disability pensions are not taxable.taxmap/pubs/p525-003.htm#en_us_publink1000229319
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/pubs/p525-003.htm#en_us_publink1000229322
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/pubs/p525-003.htm#en_us_publink1000229323
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/pubs/p525-003.htm#en_us_publink1000229324
You retired in 2003 and receive a pension based on your years of service. On August 6, 2009, 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 2006, 2007, and 2008. However, under the special limitation period, you can also file a claim for 2005 as long as you file the claim by August 6, 2010. You cannot file a claim for 2003 and 2004 because those tax years began more than 5 years before the determination.taxmap/pubs/p525-003.htm#en_us_publink1000229326
Do not include in your income disability payments you receive for injuries resulting directly from a terrorist or military action.
A terrorist action is one that is directed against the United States or any of its allies (including a multinational force in which the United States is participating). A military action is one that involves the armed forces of the United States and is a result of actual or threatened violence or aggression against the United States or any of its allies, but does not include training exercises.taxmap/pubs/p525-003.htm#en_us_publink1000229327
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, rehabilitative services, and maintenance and personal care services, and
- Required by a chronically ill individual and provided pursuant to a plan of care 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 a 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.
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 period.
- The dollar amount for the period ($280 per day for any period in 2009).
See Section C of Form 8853 and its instructions for more information.
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 a discussion of the taxability of these benefits, see Other Income under Miscellaneous Income, later.
If you return to work after qualifying for workers' compensation, salary payments you receive for performing light duties are taxable as wages. taxmap/pubs/p525-003.htm#en_us_publink1000229334
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 tax. taxmap/pubs/p525-003.htm#en_us_publink1000229335
In addition to disability pensions and annuities, you may receive other payments for sickness or injury.taxmap/pubs/p525-003.htm#en_us_publink1000229336
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/pubs/p525-003.htm#en_us_publink1000229337
These payments are similar to workers' compensation and generally are not taxable. taxmap/pubs/p525-003.htm#en_us_publink1000173491
The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) provides that if you were covered under a group health plan and you would lose coverage because of a qualifying event, you should be allowed an opportunity to elect COBRA continuation health coverage under the plan. If there was no available election, your employer or the plan was subject to an excise tax. You can be required to pay the full premium for the COBRA continuation coverage.
If you are an assistance eligible individual, you pay 35% of the premium otherwise payable for this coverage and are treated as having paid the full premium. You are an assistance eligible individual if:
- You are a qualified beneficiary as the result of an involuntary termination that occurred during the period beginning on September 1, 2008, and ending on December 31, 2009,
- You are eligible for COBRA continuation health coverage at any time during that period, and
- You elect the coverage.
A qualified beneficiary is generally any individual who is covered under a group health plan on the day before the involuntary termination. This includes the covered employee, the employee's spouse, and the employee's dependent.
The premium assistance (the 65% reduction of the premium) applies to the first period of coverage beginning after February 16, 2009. The reduction applies until the earliest of:
- The first date the assistance eligible individual becomes eligible for other group health plan coverage or Medicare coverage,
- The date that is 9 months after the first day of the first month for which the reduced premium applies to the individual, or
- The date the individual ceases to be eligible for COBRA continuation coverage.
The premium assistance is not included in your gross income. However, if your modified adjusted gross income (AGI) is more than $125,000 ($250,000 if married filing jointly) but not more than $145,000 ($290,000 if married filing jointly), your income tax for the tax year is increased by a percentage of the premium assistance. Your modified AGI is your AGI on Form 1040, line 38 or Form 1040NR, line 35 plus any foreign earned income exclusion, foreign housing exclusion, foreign housing deduction, and exclusion of income for bona fide residents of American Samoa and Puerto Rico. The percentage that increases your tax is determined by dividing the excess modified AGI (amount over $125,000 ($250,000 if married filing jointly)) by $20,000 ($40,000 if married filing jointly). If your modified AGI is more than $145,000 ($290,000 if married filing jointly), your income tax for the tax year is increased by the premium assistance. Include the increase in your income tax on Form 1040, line 60 or Form 1040NR, line 57. On the dotted line next to that line, enter the amount of the tax and identify it as "COBRA."
You may elect to permanently waive the right to the premium assistance. You will not receive the premium assistance and you will not have to include the assistance in your income tax if your modified AGI is more than $125,000 ($250,000 if married filing jointly). To make this election, give a signed and dated notification (include a reference to "permanent waiver") to the person to whom premiums are payable.taxmap/pubs/p525-003.htm#en_us_publink1000229338
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 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 Other Income under Miscellaneous Income, later.
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/pubs/p525-003.htm#en_us_publink1000229340
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. See Court awards and damages under Other Income, later.
- 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 generally is 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.
If you receive an "advance reimbursement" or "loan" for future medical expenses from your employer without regard to whether you suffered a personal injury or sickness or incurred medical expenses, that amount is included in your income, whether or not you incur uninsured medical expenses during the year.
Reimbursements received under your employer's plan for expenses incurred before the plan was established are included in income.
Amounts you receive under a reimbursement plan that provides for the payment of unused reimbursement amounts in cash or other benefits are included in your income. However, a qualified HSA distribution from a health flexible spending account or health reimbursement account can be made to a health savings account. For details, see Publication 969.
Reimbursements received under your employer's plan of the amount paid for nonprescription medicines and drugs (such as allergy medicine, pain reliever, and cold medicine) are not included in income. However, reimbursements of the amount paid for dietary supplements (such as vitamins) that are merely beneficial to your general health are included in income.