If you retire due to disability, the amount you receive must be reported as taxable income, with some exceptions. If you contributed to the cost of the pension or disability annuity, the amount you contributed is not taxable. If the amount of your disability includes reimbursement for medical expenses, this amount is also not taxable. Although the payer of the pension or annuity should predetermine the taxable amount, always verify the information and then proceed to report the disability income on your tax return.
Visit the IRS website and obtain a copy of the tax form that best suits your tax situation. Forms include 1040-A for simple tax returns, 1040 for those who own a business or itemize deductions and Form 1040-NR for non-U.S. residents.
Refer to Form 1099-R, Box 2a, for the amount of disability income received during the tax year. Determine whether the disability received was before reaching the minimum retirement age or after. Your employer predetermines this age.
Enter the amount from Box 2a into line 7 of Form 1040-A or Form 1040 if the amount was received before reaching the minimum retirement age. Report the amount from Box 2a on line 12a and 12b of Form 1040-A , or on line 16a and 16b of Form 1040 if the amount was received after reaching the minimum retirement age.
If you received Social Security Disability benefits, complete Social Security Benefits Worksheet included in the Form 1040 Instructions. This worksheet helps to determine the taxable amount. Enter the net amount in line 20a and the taxable amount in line 20b of Form 1040. If you are using Form 1040-A, enter the net amount in line 14a and the taxable amount in Line 14b.