Have a Tax Question? Ask a Tax Expert
This depends on what the payment was earmarked to replace.
Amounts you receive as workers' compensation for an occupational sickness or injury are fully exempt from tax if they are paid under a workers' compensation act or a statute in the nature of a workers' compensation act. (even if received in lump sum)
IF this is part of workman's comp, then it is not taxable.
If on the other hand it replaces lost wages and is not workers comp, then it would be come taxable. since you said it was L&I, then L&I in Washington is worker's comp. this means it is not taxable.
You should recieve a 1099 at the end of the year, sometime in Janaury or early february, that 1099 will indicate the kind of payment it is and if it is taxable or not.
I am assuming that because it is for disability and it is L&I, that it is from the workman's compensation department and there for not taxable.