Disability Pay

If you receive payments because of disability under a plan paid for by your employer, the benefits will be taxable; if you paid for the plan yourself, they are not taxable.

"Paying for the plan yourself" includes paying through payroll deductions that were made from your after-tax income. However, if you paid for the plan through pre-tax payroll contributions, as in a cafeteria-plan arrangement, the benefits you receive are taxable.

Certain types of military and government disability pensions are not taxable. VA disability payments are not taxable, including awards made retroactively after retirement for length of service, and the equivalent of VA benefits that would have been paid if you receive a lump-sum disability severance award. Disability payments for combat-related injuries, or injuries sustained in a terrorist attack while serving as a U.S. government official, are tax-exempt. Also persons who were eligible to receive a disability payment before September 25, 1975 may generally exclude their disability payments.

If the benefits are taxable, they are reported on Line 7 of Form 1040 or 1040A until you reach minimum retirement age. Beginning on the day after you reach minimum retirement age under your employer's plan, the benefits are treated as pension benefits and reported on Lines 16a and 16b of Form 1040, or on Lines 12a and 12b of Form 1040A.