When a person is awarded workers' compensation following an incident in the workplace, he or she is likely to have tax questions. Find the answers you need about your situation in this guide.

Amounts received under a workers’ compensation act or similar law for personal injuries or sickness are excludable from the employee's (or survivor's) income. This rule doesn't apply to the extent payments are determined by reference to the employee's age or length of service or his prior contributions, even if his retirement is occasioned by occupational injury. (Reg § 1.104-1(b))

Workers’ compensation is includible in income to the extent it's attributable to medical expense deductions taken in an earlier year. (Code Sec. 104(a)(1); Reg § 1.104-1(b)).

Legal costs are only deductible for the production or protection of taxable income. If the settlement is not taxable, then the legal expenses are not deductible.

Caution: The TCJA of 2017 suspended the tier 2 miscellaneous itemized deductions for years 2018 through 2025, so even if a settlement is taxable in those years, the legal expenses aren’t deductible. The exception that permits an above-the-line deduction for legal fees and associated expenses related to certain unlawful discrimination awards is unaffected by the TCJA provision.