Is disability income taxable? Generally, income you receive for disability through an employer-paid accident or health insurance plan must be included on your tax return. An exclusion exists if certain payments are for personal injury or sickness. A married couple received disability income from the husband’s retirement plan and were sent a Form 1099-R for the amount. No exclusion applied, yet they didn’t report the income on their federal tax return, claiming the amount wasn’t taxable. The U.S. Tax Court found that the payments were taxable. Due to a prior ruling against the couple, the court warned them that penalties could apply if they persisted with the same arguments. Contact us if you have any question regarding taxable income.