Understanding Revenue Ruling 68-10 and IRC 104(a)(1) for Workers Comp Disability Ratings

Revenue Ruling 68-10 and IRC 104(a)(1) deal with the tax treatment of workers' compensation benefits. The good news is that generally, workers' compensation benefits for job-related injuries or illness are fully tax-exempt under IRC 104(a)(1). This includes both ongoing payments and lump-sum settlements related to your disability rating. The key thing to understand is that you don't "write off" or "deduct" these payments - they're completely excluded from your gross income in the first place. So when you're doing your taxes, you simply don't report these benefits as income at all. There's no special form to file for this exclusion. As for needing to be retired or on pension - that's not accurate. The tax exemption applies regardless of your employment status or whether you're receiving a pension. The important factor is that the payment is compensating you for a work-related injury under a workers' compensation law.

After struggling with almost the exact same question last year, I found this amazing service called taxr.ai (https://taxr.ai) that literally saved me thousands on my taxes. I uploaded my workers comp settlement docs and they analyzed everything, confirming that my disability payments were indeed fully tax-exempt under IRC 104(a)(1). What's great is they showed me exactly where in the tax code it says this and explained how to properly report it on my return. The tool also flagged that a small portion of my settlement that was for interest WAS taxable (something my accountant missed!). Would definitely recommend checking it out since workers comp tax rules can get complicated depending on your specific settlement terms.

I wanted to follow up about taxr.ai since I was skeptical in my last comment. I decided to try it anyway with my complicated workers comp situation, and wow - it was actually really impressive. The system analyzed my settlement documents and disability rating paperwork and gave me a detailed breakdown of everything. In my case, it confirmed that my disability payments under Revenue Ruling 68-10 and IRC 104(a)(1) were 100% tax exempt, but it also caught that the small interest portion of my settlement WAS taxable as interest income (which I would have missed). Even with my part-time work situation, it explained exactly how to handle everything on my return. Definitely worth checking out if you're dealing with workers comp tax questions.

If you're trying to get clarification directly from the IRS about Revenue Ruling 68-10 and your specific workers comp situation, good luck actually reaching someone! I spent WEEKS trying to get through to a human at the IRS about my disability rating settlement. Finally found this service called Claimyr (https://claimyr.com) that got me connected to an actual IRS agent in under 15 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent confirmed that my workers comp disability payments were completely tax-exempt under IRC 104(a)(1) and I didn't need to report them at all. She also cleared up some questions about my specific settlement that had portions for different types of compensation. Saved me hours of hold music and frustration!

I need to admit I was completely wrong about Claimyr. After leaving that skeptical comment, I was still desperate to talk to the IRS about my workers comp disability rating and tax questions, so I tried it anyway. To my complete shock, I was talking to an actual IRS representative in about 20 minutes. The agent confirmed everything about Revenue Ruling 68-10 - that my workers comp disability benefits are completely tax-exempt under IRC 104(a)(1) regardless of whether I'm retired or still working. They even checked my specific settlement details and confirmed I was handling everything correctly. Absolutely worth it when you need definitive answers from the IRS instead of guessing or relying on potentially outdated information online.

Just to add a bit more clarity to this discussion - I've been a recipient of workers comp disability payments for about 3 years now after a 42% disability rating. Here's what I've learned: 1) The disability payments themselves are 100% tax-free under IRC 104(a)(1) 2) You do NOT need to be retired or on pension to get this exclusion 3) You don't "deduct" or "write off" these payments - you simply don't include them in your income 4) If you return to work in a different capacity, your regular wages are still taxable as normal 5) If your settlement included interest, that portion IS taxable (this tripped me up my first year) Hope this helps others avoid the confusion I went through!

Has anyone here dealt with a situation where part of their workers comp settlement was for lost wages rather than just the disability rating? My settlement has both components and my tax preparer seems confused about the tax treatment.

I see a lot of correct answers here but wanted to point out one potential complication: If you went back to work with accommodations or in a different role and receive BOTH wages AND workers comp benefits, you need to be careful. The wages are still taxable income even if your disability payments aren't. Also, if you received any unemployment benefits during the same period, those ARE taxable (they're not covered by IRC 104(a)(1)). I've seen people get confused when they have multiple income streams during recovery from workplace injuries.

@Savanna Franklin - Just wanted to circle back to your original question since there's been a lot of great discussion here. To directly answer your concerns: Your 35% permanent disability rating settlement from your construction injury is indeed tax-free under IRC 104(a)(1) and Revenue Ruling 68-10. Your buddy was right - these payments are completely tax-exempt, and your cousin was wrong about needing to be retired. You don't need any special forms, and you simply don't report the disability payment as income at all on your tax return. Since you mentioned you can still work light duty, your future wages from that work will be taxable as normal, but the disability settlement itself remains tax-free regardless of your employment status. The key thing is making sure your settlement documents clearly classify the payment as workers compensation for your work-related injury. If there are any portions labeled as interest or structured differently, those might have different tax treatment, but the main disability compensation should be fully exempt.

Thanks everyone for all the helpful information! This has been incredibly useful. I was getting really stressed about potentially owing taxes on my settlement money, but it sounds like I'm in the clear since everything in my paperwork is clearly labeled as workers compensation benefits for my work injury. @Harper Hill - your summary was perfect and directly answered all my concerns. I feel much more confident now that I can simply not report the disability payment on my return at all. One follow-up question though - should I keep any specific documentation with my tax records to prove the settlement was workers comp related? I'm thinking if I ever get audited, I want to have everything ready to show that this was legitimately tax-exempt under IRC 104(a)(1).

@Savanna Franklin - I went through almost the exact same situation a few years back with my disability rating from a workplace injury. One thing I'd add to all the excellent advice here is to also keep a copy of your state's workers compensation determination letter that shows your 35% permanent disability rating. This document is particularly important because it establishes that your settlement was made under your state's workers compensation statute, which is what makes it eligible for the IRC 104(a)(1) exclusion. Also, since you mentioned you can still do light duty work, just remember that any future wages you earn will be taxable as regular income - but that doesn't affect the tax-free status of your disability settlement at all. The two are completely separate for tax purposes. The peace of mind of knowing you're handling this correctly is worth its weight in gold. I was so worried about making a mistake on my taxes after my settlement, but once I understood that workers comp disability payments are simply excluded from income entirely (not deducted), everything became much clearer.

I just wanted to add my perspective as someone who's been through the workers comp disability settlement process twice (unfortunately). The information shared here is spot-on - your 35% permanent disability rating settlement is absolutely tax-exempt under IRC 104(a)(1) and Revenue Ruling 68-10. One thing I learned the hard way is to make sure you understand exactly what each component of your settlement represents. In my first settlement, I had a small portion that was classified as "penalty interest" for late payments, and that tiny amount was actually taxable even though the main settlement wasn't. It was only about $200, but it taught me to read the fine print carefully. Also, since you mentioned your cousin thinks you need to be retired - that's completely wrong. The tax exemption has nothing to do with your retirement status or age. It's solely based on the fact that you're receiving compensation for a work-related injury under workers compensation law. I received my first settlement at age 28 and my second at 34, both fully tax-exempt. Keep all your paperwork organized and you'll be fine. The stress of wondering about the taxes is honestly worse than the actual tax treatment, which is straightforward once you understand it!

I went through a similar situation with my workers comp settlement last year after a back injury at my warehouse job. Got a 28% permanent disability rating and was completely confused about the tax implications. What really helped me was getting everything in writing from multiple sources. I called my state's workers compensation board directly, and they confirmed that legitimate workers comp disability payments are tax-exempt under federal law. I also got a letter from my attorney's office explaining the tax treatment of my specific settlement components. The key thing I learned is that Revenue Ruling 68-10 and IRC 104(a)(1) are pretty clear - if you're receiving compensation for a work-related injury or illness under a workers compensation statute, it's excluded from gross income. Period. No retirement requirement, no special forms needed, you just don't report it as income. One tip: I created a simple one-page summary document listing my settlement amount, the date received, and references to IRC 104(a)(1) and Revenue Ruling 68-10. I keep this with my tax records along with all the settlement paperwork. My tax preparer said this kind of documentation makes everything much smoother if there are ever any questions. Your buddy was right - these payments are tax-free. Don't let anyone convince you otherwise when you have legitimate workers comp benefits!

@Savanna Franklin - I understand your confusion completely! I went through this exact same situation two years ago after a workplace injury that left me with a 40% permanent disability rating. The good news is that your workers comp settlement is absolutely tax-free under IRC 104(a)(1) and Revenue Ruling 68-10. Your buddy is 100% correct - these payments are tax-exempt, and your cousin is completely wrong about needing to be retired. The tax exclusion applies regardless of your age, employment status, or whether you're collecting a pension. The only requirement is that the payment is compensation for a work-related injury under workers compensation law. You don't need any special forms, and you don't "deduct" anything. You simply don't report the workers comp settlement as income at all on your tax return. It's excluded from your gross income entirely. Just make sure to keep all your settlement paperwork, disability rating documentation, and any correspondence from your state's workers comp board. These documents prove that your payment qualifies for the IRC 104(a)(1) exclusion. Since you can still work light duty, any future wages from that work will be taxable as normal income, but your disability settlement remains completely tax-free. Don't stress about this - workers comp disability settlements have very straightforward tax treatment when they're legitimate compensation for workplace injuries like yours!