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IRS.gov Website
Publication 525
taxmap/pubs/p525-003.htm#en_us_publink1000229310

Sickness and
Injury Benefits(p17)

rule
In most cases, 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.
Deposit
Do not report as income any amounts paid to reimburse you for medical expenses you incurred after the plan was established.
taxmap/pubs/p525-003.htm#en_us_publink1000229312

Cost paid by you.(p17)

rule
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

Cafeteria plans.(p17)

rule
In most cases, 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

Disability Pensions(p17)

rule
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.
Deposit
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

Retirement and profit-sharing plans.(p17)

rule
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

Accrued leave payment.(p17)

rule
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

Military and Government
Disability Pensions(p17)

rule
Certain military and government disability pensions are not taxable.
taxmap/pubs/p525-003.htm#en_us_publink1000229319

Service-connected disability.(p17)

rule
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.
taxmap/pubs/p525-003.htm#en_us_publink1000229320
Conditions for exclusion.(p17)
Do not include the disability payments in your income if any of the following conditions apply.
  1. You were entitled to receive a disability payment before September 25, 1975.
  2. 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.
  3. You receive the disability payments for a combat-related injury. This is a personal injury or sickness that:
    1. Results directly from armed conflict,
    2. Takes place while you are engaged in extra-hazardous service,
    3. Takes place under conditions simulating war, including training exercises such as maneuvers, or
    4. Is caused by an instrumentality of war.
  4. 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.
taxmap/pubs/p525-003.htm#en_us_publink1000229321

Pension based on years of service.(p17)

rule
If you receive a disability pension based on years of service, in most cases you 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
Retroactive VA determination.(p17)
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. You must include with each Form 1040X a copy of the official VA Determination letter granting the retroactive benefit. The letter must show the amount withheld and the effective date of the benefit.
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
Special statute of limitations.(p17)
In most cases, 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

Example.(p17)

You retired in 2006 and receive a pension based on your years of service. On August 1, 2012, you receive a determination of service-connected disability retroactive to 2006. Generally, you could claim a refund for the taxes paid on your pension for 2009, 2010, and 2011. However, under the special limitation period, you can also file a claim for 2008 as long as you file the claim by August 1, 2013. You cannot file a claim for 2006 and 2007 because those tax years began more than 5 years before the determination.
taxmap/pubs/p525-003.htm#en_us_publink1000229326

Terrorist attack or military action.(p18)

rule
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(p18)

rule
In most cases, long-term care insurance contracts are treated as accident and health insurance contracts. Amounts you receive from them (other than policyholder dividends or premium refunds) are excludable in most cases 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:
taxmap/pubs/p525-003.htm#en_us_publink1000229328

Qualified long-term care services.(p18)

rule
Qualified long-term care services are:
taxmap/pubs/p525-003.htm#en_us_publink1000229329

Chronically ill individual.(p18)

rule
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.
taxmap/pubs/p525-003.htm#en_us_publink1000229330

Limit on exclusion.(p18)

rule
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. See Section C of Form 8853 and its instructions for more information.
taxmap/pubs/p525-003.htm#en_us_publink1000229331

Workers' Compensation(p18)

rule
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.
EIC
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.
taxmap/pubs/p525-003.htm#en_us_publink1000229333

Return to work.(p18)

rule
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

Disability pension.(p18)

rule
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

Other Sickness
and Injury Benefits(p18)

rule
In addition to disability pensions and annuities, you may receive other payments for sickness or injury.
taxmap/pubs/p525-003.htm#en_us_publink1000229336

Railroad sick pay.(p18)

rule
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

Black lung benefit payments.(p18)

rule
These payments are similar to workers' compensation and are not taxable in most cases.
taxmap/pubs/p525-003.htm#en_us_publink1000229338

Federal Employees' Compensation Act (FECA).(p18)

rule
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.
EIC
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_publink1000252456

Qualified Indian health care benefit.(p18)

rule
For benefits and coverage provided after March 23, 2010, the value of any qualified Indian health care benefit is not taxable. These benefits include any health service or benefits provided by the Indian Health Service, amounts to reimburse medical care expenses provided by an Indian tribe, coverage under accident or health insurance, and any other medical care provided by an Indian tribe.
taxmap/pubs/p525-003.htm#en_us_publink1000229340

Other compensation.(p18)

rule
Many other amounts you receive as compensation for sickness or injury are not taxable. These include the following amounts.
taxmap/pubs/p525-003.htm#en_us_publink1000229341

Reimbursement for medical care.(p19)

rule
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.