Disability payments

Certain disability payments may qualify for the pension and annuity subtraction. Taxable permanent disability benefits received by an individual age 55 or older at the close of the tax year qualify for the subtraction, even if the compensation is characterized as wages rather than pension and annuity income for federal income tax purposes.

However, disability payments that are not for permanent disability, regardless of their source, do not qualify for the subtraction, even if reported as pension and annuity income on a taxpayer’s federal income tax return.

Railroad disability benefits are exempt from state taxation under Section 231m of the Railroad Retirement Act, along with other railroad retirement annuity benefits. Taxpayers receiving railroad disability benefits in their federal taxable income can claim the railroad benefit subtraction, rather than the pension and annuity subtraction, for those benefits. Information about the subtraction for railroad retirement benefits appears later in this publication.