W is for Workers’ Compensation.
For federal income tax purposes, workers’ compensation awarded under a workers’ compensation act or statute due to work-related sickness or injury are fully exempt from tax. Payments to your survivors under the same circumstances are also exempt.
The same cannot be said for retirement plan benefits. If you receive those based on age, length of service, or prior contributions to the plan, those will be taxable – even if you retired because of an occupational sickness or injury.
Similarly, if part of your workers’ compensation reduces your Social Security (or equivalent railroad retirement benefits), that part is treated as Social Security and could be taxable. You’ll want to figure whether it’s taxable using the normal formula for Social Security benefits: add half of the total Social Security benefits to your other income. If that amount is more than your base amount ($25,000 for taxpayers filing as single, head of household, qualifying widow(er) with a dependent child and married filing separately who did not live with a spouse at any time during the year; $32,000 for married taxpayers filing jointly; and $0 for taxpayers filing as married filing separately who lived together at any time during the year), some of your benefits may be taxable.
