Is disability income taxable?
Worker's comp and service-connected veteran's disability payments aren't taxable and don't need to be reported on your return.
In addition, disability benefits for loss of income or earning capability resulting from injuries under a no-fault auto insurance policy aren't taxable either.
Disability paid by an insurance company for lost wages, loss of limb, loss of sight (etc.) may or may not be taxable, depending on circumstance:
- If the premiums were paid by your employer and were not included in your taxable income, the disability is taxable.
- If you paid the premiums out of your own pocket or with payroll deductions that came out of your after-tax income, the disability is not taxable.
- If you and your employer jointly paid the premiums, only the disability amount covered by your employer's payments are taxable.
If you retired due to a disability, the pension you receive through an employer-paid plan counts as wage income until you reach the minimum retirement age (the age at which you can receive a pension if not disabled). Once you reach that minimum retirement age, the pension is no longer reported as wage income but as pension income.