Disability pensions and disability benefits

[Tax Pro]

My answer is "D." :)

 

How old is the taxpayer? (This is important)

 

http://en.wikipedia.org/wiki/Disability_pension

 

http://www.nolo.com/legal-encyclopedia/are-disability-pensions-benefits-taxable-income.html

 

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Disability pension (Pub 907, page 3)

   If you retired on disability, you must include in income any disability pension you receive under a plan that is paid for by your employer. You must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A until you reach minimum retirement age. Minimum retirement age generally is the age at which you can first receive a pension or annuity if you are not disabled.

   Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. Report the payments on lines 16a and 16b of Form 1040 or on lines 12a and 12b of Form 1040A. For more information on pensions and annuities, see Publication 575, Pension and Annuity Income.

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You may receive other payments that are related to your disability. The following payments are not taxable.

• Benefit payments from a public welfare fund, such as payments due to blindness.
• Workers' compensation for an occupational sickness or injury if paid under a workers' compensation act or similar law.
• Compensatory (but not punitive) damages for physical injury or physical sickness.
• Disability benefits under a "no-fault" car insurance policy for loss of income or earning capacity as a result of injuries.
• Compensation for permanent loss or loss of use of a part or function of your body, or for your permanent disfigurement.

References:

Pub 525, Taxable and Nontaxable Income

Pub 575, Pension and Annuity Income

Pub 524, Credit for the Elderly or the Disabled

Pub 907, Tax Highlights for Persons with Disabilities