More information is needed.
If a disability insurance policy is paid for from pre-tax money or by the employer, the proceeds are taxable income. If a disability policy is paid by the employee with after-tax money, the proceeds are not taxable.
If a person retires on disability and receives a pension, the pension is taxable as wages until the employee reaches minimum retirement age--this means paying income tax AND social security and medicare tax. Once the person reaches minimum retirement age, the pension becomes taxable as a pension and is subject to income tax but not social security and Medicare tax.
Pensions are never tax-free, except that some state employee pensions may be tax-free in that state.
What exactly happened and what forms did you get?
