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Is Workers' Compensation Taxable Income?

Q: I received a workers’ compensation settlement of $37,000. Is this taxable income?

A: Workers’ compensation benefits are almost always non-taxable. However, your workers’ compensation may be indirectly subject to tax on your tax return. The explanation for that is as follows: The part of your workers’ compensation that reduces your Social Security benefits or equivalent railroad retirement benefits is considered Social Security benefits. That amount may be taxable on your tax return under rules for those types of income.

These questions are actual inquiries submitted by taxpayers to our AARP Tax-Aide Program. The AARP Tax-Aide Program is a volunteer-run, free tax-preparation and assistance program offered to low- and middle-income taxpayers with special attention to those age 60 and older. Our volunteers are trained and IRS-certified to understand individual federal-tax issues. Our volunteers provide tax assistance as a public service and cannot guarantee the accuracy of the information provided.

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