Yes, your wife can exclude her disability pension income from Israeli police for any personal injury or sickness resulting from the foreign government services. Please see IRS Publication 525 - Section Military and Government Disability Pensions for more information.
Because the disability pension income is not included in the federal AGI and is not treated as an addition to the income per Maryland Form 502 instructions, you don't need to report the income on the Maryland tax return. Please see Maryland Form 502 instructions - additions to income section for more information.
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