Disability Benefits May Be Tax-Free Workers’ Compensation

That’s what happened to a state employee who suffered a work-related injury. She applied for disability retirement due to her injury and a state board approved her service-related disability retirement. She initially included the payments as income, but sued in a federal district court to obtain a refund on the grounds that the payments were in the nature of workers’ compensation. The IRS opposed her position,

The court ruled in her favor (Diane Kiczuk DC CT, 3/31/23). Code Sec. 104(a) excludes from taxable income amounts received by an employee “under a statute in the nature of a workmen’s compensation act.” Here, the court ruled that the payments were made to her under a state statute (Connecticut Gen Stat. Sec. 5-192p) that was “in the nature of workers’ compensation.” She received the benefits because of a work-related injury, so her refund was allowed.