J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

2.14 Disability Pensions

Disability pensions financed by your employer are taxable wages unless they are for severe permanent physical injuries that qualify for tax-free treatment (3.3), they are tax-free workers’ compensation (2.13), or they are tax-free government payments as discussed in this section.

Taxable disability pensions are reported as wages until you reach the minimum retirement age under the employer’s plan. After reaching minimum retirement age, payments are reported as a pension (7.25).

If you receive little or no Social Security and your other income is below a specified threshold, you may be eligible to claim a tax credit for disability payments received while you are under the age of 65 and permanently and totally disabled (34.7).

Injury or sickness resulting from active military service.

Disability pensions for personal injuries or sickness resulting from active service in the armed forces are taxable if you joined the service after September 24, 1975.

Military disability payments are tax free if before September 25, 1975, you were entitled to military disability benefits or if on that date you were a member of the armed forces (or reserve unit) of the U.S. or any other country or were under a binding written commitment to become a member. A similar tax-free rule applies to disability pensions from the following government agencies if you were entitled to the payments before September 25, 1975, or were a member of the service (or committed to joining) on that ...