@Fotoman1 I'm replying to this post because it's a common question and people have continued to ask about it in this message thread going on five years now. I am a disabled police officer, collect disability retirement benefits, and do not have to report any of it as income. If you're in this situation, you shouldn't be using Turbo Tax. You need an accountant who can navigate the IRS. I see this thread has other people later in the discussion who were audited due to TurboTax's handling of this issue. There is case law covering these specific types of cases, and the $3,000 limit being quoted repeatedly by the so-called experts in this thread are not universally applied to police disability cases. The simple answer is that whether it is taxable depends on several things. In my case, I live in a state where local police disability claims are handled by the state's police retirement plan, which was established and governed by state legislation. That legislation is worded in a way consistent with the federal definition of worker's compensation, including the stipulation that age and the number of years of service do not factor into the equation regarding the amount of benefits for disability claims that are paid at a set percentage for every officer classified as totally disabled from service and which are paid through the retirement system, which generates a W-2, listing the income tax liability as unknown. That W2 (or 1099 as some of you mentioned) is a nightmare for an audited person who doesn't have a Certified Public Accountant and who, rightfully, hasn't been paying taxes on this money. There are several cases where this has already been ruled on by the courts in favor of disabled police not paying taxes. The taxability specifically for police disability claims depends greatly on the way the retirement systems are organized and the state laws regarding their payouts. No disabled officer should be using an at-home do-it-yourself tax program to file taxes. If the IRS audits you, and you end up being unlucky enough to get an IRS agent not familiar with the case law on these, which considering how rarely they deal with these is a lot of them, you're going to need to have an informed accountant or tax lawyer to fix it on the front end with a well-thought-out explanation. My accountant knows the IRS agents in our region and has a multi-decade history of knowing what to say and which sources to mention to point them toward the laws and court rulings governing police-specific disability cases. For those on this thread who have posted in multiple years about their IRS problems due to TurboTax, quite simply, it wasn't designed with us in mind. It's designed for the average person with taxable income, and we are in a very small minority with a special set of unique tax circumstances that don't apply to the majority of disabled people in other career fields, and which go beyond simply looking at the IRS code in that case law impacts us as well. Here's one of the many legal cases that upheld an officer's right to exclude 100% from taxable reporting: Picard v. Commissioner of Internal Revenue. That's a good starter read for the "experts" who keep giving incorrect advice for disabled officers in this forum. And before all the experts start mentioning that Picard doesn't apply to this or that specific type of police disability, just stop before you start because there are so many different court rulings regarding so many different specific police disability cases and specific pension plans that you're just not going to be able to win the argument that somehow, someway your advice about the $3,000 limit was applicable to this discussion. Also, disabled officers shouldn't be assuming that their disability is automatically tax free or that it will always be tax free. Again, it depends largely on the wording of the state laws governing your pension plan's handling of police disabilities and the case laws applicable to plans with similar or identical wording.
