Is a disability pension taxable?

Employer-paid disability pensions

The Disability Pensions section of Publication 525 is direct: if you retired on disability, you must include in income any disability pension you receive under a plan that is paid for by your employer. Until you reach minimum retirement age, you report taxable disability payments on line 1h of Form 1040 or 1040-SR, as if they were wages. Minimum retirement age is generally the age at which you can first receive a pension or annuity if you are not disabled. The publication also notes you may be entitled to a tax credit if you were permanently and totally disabled when you retired; that credit is covered in Publication 524.

After minimum retirement age

Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. Report them on lines 5a and 5b of Form 1040 or 1040-SR. Publication 575 covers pensions and annuities in detail. A lump-sum payment for accrued annual leave when you retire on disability is a salary payment, not a disability payment; include it in income in the year received. Payments from a retirement or profit-sharing plan that does not provide for disability retirement are not a disability pension and are reported as a pension or annuity.

Military and government disability pensions

Certain military and government disability pensions are not taxable. You may exclude amounts received as a pension, annuity or similar allowance for personal injury or sickness resulting from active service in the armed forces of any country, the National Oceanic and Atmospheric Administration, the Public Health Service or the Foreign Service, if any of these conditions applies:

• You were entitled to receive a disability payment before September 25, 1975.
• You were a member of a listed service or its reserve component, or under a binding written commitment to become one, on September 24, 1975.
• You receive the payments for a combat-related injury: one that results directly from armed conflict, takes place while engaged in extra-hazardous service, takes place under conditions simulating war (including training exercises such as maneuvers), or is caused by an instrumentality of war.
• You would be entitled to receive disability compensation from the VA if you filed for it. The exclusion equals the amount you would be entitled to receive from the VA.

If your disability pension is based on years of service, you generally include it, except that if it qualifies for the service-connected exclusion you leave out the part you would have received had the pension been based on a percentage of disability. Combat-related special compensation under 10 U.S.C. section 1413a, payable only to retirees of the uniformed services, may be excluded.

Retroactive VA determinations

If you retire from the armed forces based on years of service and later receive a retroactive service-connected disability rating from the VA, your retirement pay for the retroactive period is excluded up to the VA benefits you would have been entitled to receive. You can claim a refund of tax paid on the excludable amount, subject to the statute of limitations, by filing Form 1040-X for each prior year in the retroactive period with a copy of the VA determination letter. A special rule extends the refund-claim period by one year beginning on the date of the determination, but it does not apply to any tax year that began more than five years before the determination. In Example 19, a 2019 retiree receives a retroactive rating on August 3, 2025; claims for 2022 through 2024 are open, and 2021 can be claimed if filed by August 3, 2026, but 2019 and 2020 are not available. A lump-sum disability severance payment later offset by VA benefits is excluded at 100%; a nondisability severance on release from duty is still included.

Terrorist attacks, military action and workers’ compensation

You do not include disability payments for injuries incurred as a direct result of terrorist attacks or military action directed against the United States or its allies, but you must include amounts you would have received in retirement anyway, such as payments from a 401(k) or pension plan. Workers’ compensation paid under a workers’ compensation act for an occupational sickness or injury is fully exempt, though retirement benefits based on age, length of service or prior contributions are not. If a disability pension is paid under a statute that provides benefits only to employees with service-connected disabilities, the workers’ compensation part is exempt and the rest, based on years of service, is taxable as pension or annuity income.

Worked example

A 52-year-old retires on disability and receives $2,000 a month ($24,000 a year) from an employer-paid plan. The plan’s minimum retirement age is 62. For the next ten years the $24,000 is reported on line 1h as wages. The day after the 62nd birthday it becomes pension income on lines 5a and 5b. If the same person were a retired service member whose disability was combat-related, the amounts would be excluded instead. If the payer reports the amounts as taxable in error, Publication 525 says to contact the payer and request a corrected Form W-2 (box 12, code J) or Form 1099-R (box 1 but not box 2a).

Limits of this page

This page summarizes Publication 525 (2025). Social Security disability benefits and VA compensation have separate rules; see the taxable Social Security benefits calculator for the Social Security side.

Related Publication 525 topics

More from the same IRS publication: Is life insurance payout taxable?, Are accelerated death benefits taxable?, Are meals and lodging taxable income?.

Sources

• IRS Publication 525, Taxable and Nontaxable Income (2025): the “Disability Pensions” section and the sections it cross-references. Read November 2, 2026.

Edition read: Publication 525 (2025), for use in preparing 2025 returns. Dollar limits and dates in this publication are for 2025; check the current publication and form instructions for your tax year. This page summarizes the publication and does not replace it.