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Is disability income taxable?

        Money | Taxes

Disability payments from an insurance company may be taxable, depending on who paid the premiums.
Disability payments from an insurance company may be taxable, depending on who paid the premiums.

Most of us don't want to imagine that we'll have to receive disability payments to address an accident or injury. But if you do have the occasion to receive disability payments, you'll also need to prepare for the task of trying to figure out what -- if any -- taxes must be taken from the payments you receive. But don't dread April. While it may seem confusing, we'll go over some common ways that disability income can be recorded on a filing and help you navigate what your return might look like.

First off, disability payments come in several forms. If you're in a car accident, for instance, you might receive disability payments from a "no-fault" car insurance policy. If you retired on disability, you might receive a disability pension. You also could be receiving income from a health or accident plan, due to your disability.

Unsurprisingly, each situation brings different tax exemptions and requirements with it. So while we can't make a blanket statement that disability income is or is not taxable, we can address some of the specifics of each situation. Let's start with that disability pension that you retired on.

Assuming that your disability pension is paid by an employer, you do have to report the full amount as income. (Do note, however, that if you were permanently and totally disabled on the day you retired, you might qualify for a tax credit [source: IRS].) If you are receiving payments as part of a no-fault insurance plan, then the income is not subject to taxation and doesn't have to be reported.

If you're receiving payments from an accident or health plan, the tax code is a little more complicated. That's because some plans are paid for completely by the employer or the employee, and some are split. If you pay for the entire cost of the plan, good news: None of your disability payments are taxable. However, if both you and your employer paid the premiums for your plan, only the portion that your employer pays is taxable as income.

One other note: Don't include Veterans Affairs disability benefits as income. That could mean a host of payments: grants for homes designed for wheelchair living or vehicles that accommodate a disability, payments under a work-therapy program or benefits from a dependent-care assistance program [source: IRS]. To learn more about tax credits or programs offered for veterans with disabilities, you might want to check out the IRS website for more details.