ANSWER: Yes. Disability retirement payments are normally taxable as ordinary income. There are, however, some exceptions. For instance, persons who, in addition to meeting OPM's standard for disability retirement, are totally and permanently disabled for any gainful employment may be eligible for a special tax credit. Similarly, in certain circumstances and in certain states, persons may not have to pay state income tax on their federal annuity. Because the rules are complex and can have significant monetary consequences, you should consult a tax expert.
