Can I Exclude My Disability Income from Taxes?

Whether disability income is taxable depends on the source. Social Security Disability Insurance (SSDI) follows the same taxation rules as regular Social Security — up to 85% may be taxable depending on your combined income. Disability insurance benefits you paid for with after-tax dollars are generally tax-free. Disability benefits paid from an employer-funded plan are taxable. Veterans' disability benefits from the VA are fully excluded from income. Workers' compensation is also excluded. In short: if someone else (your employer or the government) funded the policy, the benefits are usually taxable; if you paid the premiums yourself, the benefits are usually tax-free.