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Are workers' compensation and unemployment taxable income?

Since 1987, the IRS has required unemployment benefits be included in gross income.

Workers' compensation isn't taxable if it's paid because of a job-related personal injury or sickness.

However, workers' compensation pay will be taxable in these situations:

  • The benefits offset your prior medical expense deductions.
  • Benefits are received under a private arrangement. Such benefits are taxable because they're not covered by the workers' compensation statute.
  • Benefits reduce or offset Social Security benefits. These will be taxed as Social Security benefits.

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