Some disability pensions are tax free while others are taxable. As the IRS mentions in Publication 575, disability income is tax free only if the pension was paid by you. Disablity income paid by your employer is taxable. Sadly, most pensions fall in the latter category and are taxable.
Disability Insurance Benefits Taxable?
If you paid the premiums on your disability insurance, the monthly disability income is tax free. If your disability insurance is paid for somebody else like your employer group, then your monthly disability income would be taxable. If you get disability insurance through work, you should contact your employer to find out who is paying for the premiums.
Social Security Disability and SDI
Those who are collecting disability should apply for state disability insurance (SDI) benefits as well as consider applying for Social Security Disability. Keep in mind that it’s very hard to qualify for Social Security Disability. Even those who are collecting disability income from other sources often find themselves rejected by Social Security and need to hire a Social Security disability lawyer or attorney to make their case.
Tax Free CalPERS Disability Income
If your illness or injuries is due to your job, it may qualify as a workers compensation type income and be exempt. There is a lot of controversy on this with regards to public employees such as police officers and firefighters filing for disability retirements in large numbers.
If your illness or injury have nothing to do with your job, then the disability income will be taxable, and you should have CalPERS withhold enough money to pay the taxes owed.