Most payments you receive as compensation for illness or injury are not taxable. These include the following.

Workers' compensation. 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 survivor(s).

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 in Publication 525, and Social Security and Equivalent Railroad Retirement Benefits, earlier.

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 as wages.

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. Also, pay for sick leave while a claim is being processed is taxable and must be included in your income as wages.

Benefits under an accident or health insurance policy. Benefits you receive under an accident or health insurance policy are not taxable if:

• You paid the premiums, or
• Your employer paid the premiums and you included the premiums in your gross income.

Long-term care insurance contracts. 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. Long-term care insurance contracts are discussed in more detail in Publication 525.

Compensation for permanent loss or disfigurement. Compensation you receive for permanent loss or loss of use of a part or function of your body, or for your permanent disfigurement is not taxable. 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.

Disability benefits. Benefits you receive for loss of income or earning capacity as a result of injuries under a no-fault car insurance policy are not taxable.

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