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Are Lost Wages Taxable?

Judges from the First District Appellate Court say they apply to a South Side railroad worker’s compensation after he was injured on the job. Rafael Munoz sued the Norfolk Southern Railway for negligence when he was hurt at the Calumet Yard, with a jury last year awarding the freight conductor more than $800,000 under the Federal Employer’s Liability Act. The company, which did not contest the case, noted during the hearing that Munoz would be liable for taxes on the portion of the total meant to compensate him for past and future earnings. While he agreed to pay a lien on a sickness benefit, Munoz challenged an offset that the company applied under the Railroad Retirement Tax Act.

The trial judge concurred, noting courts around the country had split on the issue and using a Missouri decision that exempts wage compensation as guidance in instructing jurors that any award would be tax-free. On appeal, a three-member panel noted the increasingly opaque definition in amendments to the railroad act since it was created in the 1930s and cited a US Supreme Court review made early in 2019 to clarify such claims. In remanding the case, appellate judges said that even though the Norfolk Southern made the payment involuntarily, the $310,000 earmarked for wage compensation still counts as earned income and is therefore subject to tax.