MaxGhenis · Oct 12, 2026 · Oct 12, 2026 · Oct 12, 2026 · Oct 13, 2026 · Oct 13, 2026
diff --git a/changelog.d/fix-disability-benefits-gross-income.fixed.md b/changelog.d/fix-disability-benefits-gross-income.fixed.md
@@ -0,0 +1 @@
+Count the taxable part of employment disability benefits in federal gross income (IRC 105(a)), with a new tax_exempt_disability_benefits input for benefits from plans the recipient paid for (IRC 104(a)(3)); count disability pensions received before minimum retirement age as earned income when entered; limit state disability subtractions to the taxable part; exclude disability benefits from Pennsylvania taxable compensation; and add the Wisconsin, New York, Iowa and Indiana disability income exclusions for people retired on permanent and total disability.
diff --git a/policyengine_us/parameters/gov/irs/gross_income/sources.yaml b/policyengine_us/parameters/gov/irs/gross_income/sources.yaml
@@ -17,8 +17,12 @@ values:
     - rental_income
     # Royalties included in rental income
     - dividend_income
-    - taxable_pension_income 
+    - taxable_pension_income
     # Pension income includes annuities and endowment contracts
+    # Disability benefits from a plan paid for by the employer (§ 105(a)),
+    # on Form 1040 line 1h until minimum retirement age, then line 5.
+    # Benefits from a plan the recipient paid for are excluded (§ 104(a)(3)).
+    - taxable_disability_benefits
     - debt_relief
     # Income in respect of a decedent (§ 61(a)(13)) has no dedicated input;
     # IRD a beneficiary receives through an estate or trust (K-1 box 5) is
@@ -49,6 +53,12 @@ metadata:
       href: https://www.law.cornell.edu/uscode/text/26/61
     - title: 26 U.S. Code § 111 - Recovery of tax benefit items
       href: https://www.law.cornell.edu/uscode/text/26/111
+    - title: 26 U.S. Code § 104(a)(3) - Amounts received through accident or health insurance
+      href: https://www.law.cornell.edu/uscode/text/26/104#a_3
+    - title: 26 U.S. Code § 105(a) - Amounts attributable to employer contributions
+      href: https://www.law.cornell.edu/uscode/text/26/105#a
+    - title: IRS Publication 525 (2024), Sickness and Injury Benefits and Disability Pensions
+      href: https://www.irs.gov/pub/irs-prior/p525--2024.pdf#page=18
     - title: 26 U.S. Code § 61(a)(14) - Income from an interest in an estate or trust
       href: https://www.law.cornell.edu/uscode/text/26/61#a_14
     - title: 2024 Schedule 1 (Form 1040), line 5 - Rental real estate, royalties, partnerships, S corporations, trusts, etc.

diff --git a/...states/ar/tax/income/exemptions/retirement_or_disability_benefits/employment_sources.yaml b/...states/ar/tax/income/exemptions/retirement_or_disability_benefits/employment_sources.yaml
@@ -1,7 +1,7 @@
 description: Arkansas exempts these employment-related retirement and disability benefits under the individual income tax retirement exemption program.
 values:
   2021-01-01:
-    - disability_benefits
+    - taxable_disability_benefits
     - taxable_pension_income
     - taxable_401k_distributions
     - taxable_403b_distributions

diff --git a/policyengine_us/parameters/gov/states/ar/tax/income/gross_income/sources/individual.yaml b/policyengine_us/parameters/gov/states/ar/tax/income/gross_income/sources/individual.yaml
@@ -17,7 +17,7 @@ values:
     - taxable_roth_conversions # Line 16, or Lines 17A/17B after age 59 1/2
     - military_retirement_pay # Line 17A/17B
     - taxable_pension_income # Line 17A/17B
-    - disability_benefits # Line 17A/17B
+    - taxable_disability_benefits # Line 17A/17B
     - rental_income # Line 18
     - estate_income # Line 18
     - farm_rent_income # Line 18, Form 4835 rent is reported on Schedule E
@@ -42,7 +42,7 @@ values:
     - taxable_roth_conversions # Line 16, or Lines 18A/18B after age 59 1/2
     - military_retirement_pay # Line 17 (Lines 17A/17B on the 2018 form)
     - taxable_pension_income # Line 18A/18B
-    - disability_benefits # Line 18A/18B
+    - taxable_disability_benefits # Line 18A/18B
     - rental_income # Line 19
     - estate_income # Line 19
     - farm_rent_income # Line 19, Form 4835 rent is reported on Schedule E
@@ -61,7 +61,7 @@ values:
     - taxable_roth_conversions # Line 16, or Lines 18A/18B after age 59 1/2
     - military_retirement_pay # Line 17
     - taxable_pension_income # Line 18A/18B
-    - disability_benefits # Line 18A/18B
+    - taxable_disability_benefits # Line 18A/18B
     - rental_income # Line 19
     - estate_income # Line 19
     - farm_rent_income # Line 19, Form 4835 rent is reported on Schedule E
@@ -83,7 +83,7 @@ values:
     - taxable_403b_distributions # Line 18A/18B
     - taxable_sep_distributions # Line 18A/18B
     - keogh_distributions # Line 18A/18B
-    - disability_benefits # Line 18A/18B
+    - taxable_disability_benefits # Line 18A/18B
     - rental_income # Line 19
     - estate_income # Line 19
     - farm_rent_income # Line 19, Form 4835 rent is reported on Schedule E

diff --git a/policyengine_us/parameters/gov/states/ar/tax/income/gross_income/sources/joint.yaml b/policyengine_us/parameters/gov/states/ar/tax/income/gross_income/sources/joint.yaml
@@ -17,7 +17,7 @@ values:
     - taxable_roth_conversions # Line 16, or Lines 17A/17B after age 59 1/2
     - military_retirement_pay # Line 17A/17B
     - taxable_pension_income # Line 17A/17B
-    - disability_benefits # Line 17A/17B
+    - taxable_disability_benefits # Line 17A/17B
     - rental_income # Line 18
     - estate_income # Line 18
     - farm_rent_income # Line 18, Form 4835 rent is reported on Schedule E
@@ -42,7 +42,7 @@ values:
     - taxable_roth_conversions # Line 16, or Lines 18A/18B after age 59 1/2
     - military_retirement_pay # Line 17 (Lines 17A/17B on the 2018 form)
     - taxable_pension_income # Line 18A/18B
-    - disability_benefits # Line 18A/18B
+    - taxable_disability_benefits # Line 18A/18B
     - rental_income # Line 19
     - estate_income # Line 19
     - farm_rent_income # Line 19, Form 4835 rent is reported on Schedule E
@@ -61,7 +61,7 @@ values:
     - taxable_roth_conversions # Line 16, or Lines 18A/18B after age 59 1/2
     - military_retirement_pay # Line 17
     - taxable_pension_income # Line 18A/18B
-    - disability_benefits # Line 18A/18B
+    - taxable_disability_benefits # Line 18A/18B
     - rental_income # Line 19
     - estate_income # Line 19
     - farm_rent_income # Line 19, Form 4835 rent is reported on Schedule E
@@ -83,7 +83,7 @@ values:
     - taxable_403b_distributions # Line 18A/18B
     - taxable_sep_distributions # Line 18A/18B
     - keogh_distributions # Line 18A/18B
-    - disability_benefits # Line 18A/18B
+    - taxable_disability_benefits # Line 18A/18B
     - rental_income # Line 19
     - estate_income # Line 19
     - farm_rent_income # Line 19, Form 4835 rent is reported on Schedule E

diff --git a/policyengine_us/parameters/gov/states/co/tax/income/subtractions/pension/income_sources.yaml b/policyengine_us/parameters/gov/states/co/tax/income/subtractions/pension/income_sources.yaml
@@ -9,7 +9,7 @@ values:
     - taxable_sep_distributions
     - keogh_distributions
     - taxable_roth_conversions
-    - disability_benefits
+    - taxable_disability_benefits
   # In 2022 the taxable social security is calculated separately.
   2022-01-01:
     - taxable_pension_income
@@ -19,7 +19,7 @@ values:
     - taxable_sep_distributions
     - keogh_distributions
     - taxable_roth_conversions
-    - disability_benefits
+    - taxable_disability_benefits
 metadata:
   period: year
   unit: list

diff --git a/...yengine_us/parameters/gov/states/ia/tax/income/disability_income_exclusion/age_limit.yaml b/...yengine_us/parameters/gov/states/ia/tax/income/disability_income_exclusion/age_limit.yaml
@@ -0,0 +1,12 @@
+description: Iowa allows the disability income exclusion to people who are under this age when the tax year ends.
+values:
+  2023-01-01: 65
+metadata:
+  unit: year
+  period: year
+  label: Iowa disability income exclusion age limit
+  reference:
+    - title: 2023 IA 2440 instructions, Who May Exclude Disability
+      href: https://revenue.iowa.gov/media/2750/download?inline=#page=2
+    - title: 2024 IA 2440 instructions, Who May Exclude Disability
+      href: https://revenue.iowa.gov/media/4096/download?inline=#page=2
diff --git a/policyengine_us/parameters/gov/states/ia/tax/income/disability_income_exclusion/cap.yaml b/policyengine_us/parameters/gov/states/ia/tax/income/disability_income_exclusion/cap.yaml
@@ -0,0 +1,12 @@
+description: Iowa limits the disability income exclusion to this amount per disabled person, $100 a week.
+values:
+  2023-01-01: 5_200
+metadata:
+  unit: currency-USD
+  period: year
+  label: Iowa disability income exclusion cap
+  reference:
+    - title: 2023 IA 2440 instructions, line 4
+      href: https://revenue.iowa.gov/media/2750/download?inline=#page=2
+    - title: 2024 IA 2440 instructions, line 4
+      href: https://revenue.iowa.gov/media/4096/download?inline=#page=2
diff --git a/.../parameters/gov/states/ia/tax/income/disability_income_exclusion/reduction_threshold.yaml b/.../parameters/gov/states/ia/tax/income/disability_income_exclusion/reduction_threshold.yaml
@@ -0,0 +1,12 @@
+description: Iowa reduces the disability income exclusion dollar for dollar by federal adjusted gross income above this amount.
+values:
+  2023-01-01: 15_000
+metadata:
+  unit: currency-USD
+  period: year
+  label: Iowa disability income exclusion reduction threshold
+  reference:
+    - title: 2023 IA 2440, line 4b
+      href: https://revenue.iowa.gov/media/2750/download?inline=#page=1
+    - title: 2024 IA 2440, line 4b
+      href: https://revenue.iowa.gov/media/4096/download?inline=#page=1
diff --git a/policyengine_us/parameters/gov/states/ia/tax/income/taxable_income/subtractions.yaml b/policyengine_us/parameters/gov/states/ia/tax/income/taxable_income/subtractions.yaml
@@ -15,6 +15,8 @@ values:
     # Iowa Health Insurance Deduction
     # Iowa capital gains deduction
     - ia_529_plan_subtraction
+    # Schedule 1 line 19b, code h (IA 2440)
+    - ia_disability_income_exclusion
   2024-01-01: # military_retirement_pay added in 2024.
     # Line 1B
     - us_govt_interest
@@ -32,6 +34,8 @@ values:
     # Iowa Health Insurance Deduction
     # Iowa capital gains deduction
     - ia_529_plan_subtraction
+    # Schedule 1 line 19b, code h (IA 2440)
+    - ia_disability_income_exclusion
 
 metadata:
   unit: list
@@ -42,5 +46,7 @@ metadata:
     href: https://revenue.iowa.gov/media/2746/download?inline
   - title: Iowa income tax law, 422.7 
     href: https://www.legis.iowa.gov/docs/code/422.7.pdf
+  - title: 2024 IA 2440 Iowa Disability Income Exclusion
+    href: https://revenue.iowa.gov/media/4096/download?inline=#page=1
   - title: 2024 IA1040 Iowa Income Tax Return Instruction
     href: https://revenue.iowa.gov/media/4152/download?inline#page=61
diff --git a/policyengine_us/parameters/gov/states/in/tax/income/deductions/deductions.yaml b/policyengine_us/parameters/gov/states/in/tax/income/deductions/deductions.yaml
@@ -11,6 +11,7 @@ values:
     - in_nol
     - in_unemployment_compensation_deduction
     - in_other_deductions
+    - in_disability_retirement_deduction # IC 6-3-2-9 (code 602)
     - in_civil_service_annuity_deduction
 
   2023-01-01:
@@ -34,6 +35,8 @@ values:
     - in_unemployment_compensation_deduction
     # IC 6-3-2
     - in_other_deductions
+    # IC 6-3-2-9 (code 602)
+    - in_disability_retirement_deduction
     # IC 6-3-2-4 (b)
     - military_basic_pay
     # IC 6-3-2-3.7
@@ -60,6 +63,8 @@ values:
     - in_unemployment_compensation_deduction
     # IC 6-3-2
     - in_other_deductions
+    # IC 6-3-2-9 (code 602)
+    - in_disability_retirement_deduction
     # IC 6-3-2-4 (b)
     - military_basic_pay
     # IC 6-3-2-28
@@ -88,6 +93,8 @@ values:
     - in_unemployment_compensation_deduction
     # IC 6-3-2
     - in_other_deductions
+    # IC 6-3-2-9 (code 602)
+    - in_disability_retirement_deduction
     # IC 6-3-2-4 (b)
     - military_basic_pay
     # IC 6-3-2-28
@@ -122,6 +129,8 @@ values:
     - in_unemployment_compensation_deduction
     # IC 6-3-2
     - in_other_deductions
+    # IC 6-3-2-9 (code 602)
+    - in_disability_retirement_deduction
     # IC 6-3-2-4 (b)
     - military_basic_pay
     # IC 6-3-2-28

diff --git a/...cyengine_us/parameters/gov/states/in/tax/income/deductions/disability_retirement/cap.yaml b/...cyengine_us/parameters/gov/states/in/tax/income/deductions/disability_retirement/cap.yaml
@@ -0,0 +1,12 @@
+description: Indiana limits the disability retirement deduction to this amount per disabled person, $100 a week.
+values:
+  2021-01-01: 5_200
+metadata:
+  unit: currency-USD
+  period: year
+  label: Indiana disability retirement deduction cap
+  reference:
+    - title: IC 6-3-2-9
+      href: https://law.justia.com/codes/indiana/title-6/article-3/chapter-2/section-6-3-2-9/
+    - title: Indiana Income Tax Information Bulletin 70, Computation of Disability Deduction
+      href: https://www.in.gov/dor/files/reference/ib70.pdf#page=2
diff --git a/...meters/gov/states/in/tax/income/deductions/disability_retirement/reduction_threshold.yaml b/...meters/gov/states/in/tax/income/deductions/disability_retirement/reduction_threshold.yaml
@@ -0,0 +1,23 @@
+description: Indiana reduces the disability retirement deduction dollar for dollar by federal adjusted gross income above this amount, by filing status.
+metadata:
+  propagate_metadata_to_children: true
+  period: year
+  unit: currency-USD
+  label: Indiana disability retirement deduction reduction threshold
+  reference:
+    - title: IC 6-3-2-9
+      href: https://law.justia.com/codes/indiana/title-6/article-3/chapter-2/section-6-3-2-9/
+    - title: Indiana Income Tax Information Bulletin 70, Computation of Disability Deduction, step 3
+      href: https://www.in.gov/dor/files/reference/ib70.pdf#page=2
+  breakdown:
+    - filing_status
+SINGLE:
+  2021-01-01: 15_000
+HEAD_OF_HOUSEHOLD:
+  2021-01-01: 15_000
+JOINT:
+  2021-01-01: 15_000
+SURVIVING_SPOUSE:
+  2021-01-01: 15_000
+SEPARATE:
+  2021-01-01: 7_500
diff --git a/...ters/gov/states/ny/tax/income/agi/subtractions/disability_income_exclusion/age_limit.yaml b/...ters/gov/states/ny/tax/income/agi/subtractions/disability_income_exclusion/age_limit.yaml
@@ -0,0 +1,10 @@
+description: New York allows the disability income exclusion to people who are under this age when the tax year ends.
+values:
+  2020-01-01: 65
+metadata:
+  unit: year
+  period: year
+  label: New York disability income exclusion age limit
+  reference:
+    - title: 2024 Instructions for Form IT-221, Who can exclude disability income
+      href: https://www.tax.ny.gov/pdf/2024/inc/it221i_2024.pdf#page=1
diff --git a/...parameters/gov/states/ny/tax/income/agi/subtractions/disability_income_exclusion/cap.yaml b/...parameters/gov/states/ny/tax/income/agi/subtractions/disability_income_exclusion/cap.yaml
@@ -0,0 +1,12 @@
+description: New York limits the disability income exclusion to this amount per disabled person, $100 a week.
+values:
+  2020-01-01: 5_200
+metadata:
+  unit: currency-USD
+  period: year
+  label: New York disability income exclusion cap
+  reference:
+    - title: N.Y. Tax Law § 612(c)(3-b)
+      href: https://www.nysenate.gov/legislation/laws/TAX/612
+    - title: 2024 Instructions for Form IT-221, Limit on exclusion
+      href: https://www.tax.ny.gov/pdf/2024/inc/it221i_2024.pdf#page=2
diff --git a/...gov/states/ny/tax/income/agi/subtractions/disability_income_exclusion/combined_limit.yaml b/...gov/states/ny/tax/income/agi/subtractions/disability_income_exclusion/combined_limit.yaml
@@ -0,0 +1,10 @@
+description: New York limits each person's disability income exclusion plus pension and annuity income exclusion to this amount.
+values:
+  2020-01-01: 20_000
+metadata:
+  unit: currency-USD
+  period: year
+  label: New York disability and pension exclusion combined limit
+  reference:
+    - title: "2024 Instructions for Form IT-221, Purpose of Form IT-221 and line 11 #page 1-2"
+      href: https://www.tax.ny.gov/pdf/2024/inc/it221i_2024.pdf#page=1
diff --git a/...tates/ny/tax/income/agi/subtractions/disability_income_exclusion/reduction_threshold.yaml b/...tates/ny/tax/income/agi/subtractions/disability_income_exclusion/reduction_threshold.yaml
@@ -0,0 +1,12 @@
+description: New York reduces the disability income exclusion dollar for dollar by federal adjusted gross income above this amount.
+values:
+  2020-01-01: 15_000
+metadata:
+  unit: currency-USD
+  period: year
+  label: New York disability income exclusion reduction threshold
+  reference:
+    - title: N.Y. Tax Law § 612(c)(3-b)
+      href: https://www.nysenate.gov/legislation/laws/TAX/612
+    - title: 2024 Instructions for Form IT-221, Limit on exclusion
+      href: https://www.tax.ny.gov/pdf/2024/inc/it221i_2024.pdf#page=2
diff --git a/policyengine_us/parameters/gov/states/ny/tax/income/agi/subtractions/sources.yaml b/policyengine_us/parameters/gov/states/ny/tax/income/agi/subtractions/sources.yaml
@@ -5,6 +5,8 @@ values:
     - us_govt_interest
     - investment_in_529_plan
     - ny_pension_exclusion
+    # N.Y. Tax Law § 612(c)(3-b) / Form IT-221 (IT-225 S-124).
+    - ny_disability_income_exclusion
     - salt_refund_income
     # N.Y. Tax Law § 612(c)(3) / Form IT-201 Line 26: subtracts pensions paid by NY state,
     # local governments, or the federal government. Pensions from other states are not exempt.
@@ -23,6 +25,8 @@ metadata:
       href: https://www.tax.ny.gov/pdf/2024/inc/it201i_2024.pdf#page=9
     - title: 2024 NY Form IT-201, Line 25 (Taxable refunds, credits, or offsets of state and local income taxes)
       href: https://www.tax.ny.gov/pdf/2024/inc/it201_2024_fill_in.pdf#page=2
+    - title: 2024 Instructions for Form IT-221, Disability Income Exclusion
+      href: https://www.tax.ny.gov/pdf/2024/inc/it221i_2024.pdf#page=1
     - title: N.Y. Tax Law § 612(c)(7)
       href: https://newyork.public.law/laws/n.y._tax_law_section_612
     - title: N.Y. Comp. Codes R. & Regs. tit. 20 § 112.3

diff --git a/policyengine_us/parameters/gov/states/oh/tax/income/deductions/deductions.yaml b/policyengine_us/parameters/gov/states/oh/tax/income/deductions/deductions.yaml
@@ -7,7 +7,7 @@ values:
     - oh_529_plan_deduction_person
     - pell_grant
     - oh_educator_expense_deduction_person
-    - disability_benefits
+    - taxable_disability_benefits
     - oh_unreimbursed_medical_care_expense_deduction_person
     - us_govt_interest_person
     - salt_refund_income

diff --git a/policyengine_us/parameters/gov/states/pa/tax/income/nontaxable_income_sources.yaml b/policyengine_us/parameters/gov/states/pa/tax/income/nontaxable_income_sources.yaml
@@ -8,9 +8,17 @@ values:
     - taxable_social_security
     - us_govt_interest
     - salt_refund_income
+    # Sick pay and disability benefits other than regular wages, including
+    # third-party insurer payments, and disability distributions (61 Pa.
+    # Code 101.6(c)(1)). Regular sick leave pay is in employment income.
+    - taxable_disability_benefits
 metadata:
   unit: currency-USD
   label: PA nontaxable income sources
   reference:
     - title: 2021 Pennsylvania PIT Return Instructions (PA-40 IN) 
       href: https://www.pa.gov/content/dam/copapwp-pagov/en/revenue/documents/formsandpublications/formsforindividuals/pit/documents/2021/2021_pa-40in.pdf#page=8
+    - title: 61 Pa. Code § 101.6(c)(1) - Compensation excludes periodic sickness and disability payments other than regular wages
+      href: https://www.pacodeandbulletin.gov/Display/pacode?file=/secure/pacode/data/061/chapter101/s101.6.html
+    - title: "2024 Pennsylvania PIT Return Instructions (PA-40 IN), nontaxable sick pay and disability benefits and Code 3 disability distributions #page 8,13"
+      href: https://www.pa.gov/content/dam/copapwp-pagov/en/revenue/documents/formsandpublications/formsforindividuals/pit/documents/2024/2024_pa-40in.pdf#page=8
diff --git a/policyengine_us/parameters/gov/states/sc/tax/income/subtractions/subtractions.yaml b/policyengine_us/parameters/gov/states/sc/tax/income/subtractions/subtractions.yaml
@@ -2,7 +2,7 @@ description: South Carolina subtracts these sources from federal taxable income
 values:
   2021-01-01:
     - salt_refund_income
-    - disability_benefits #include tax disability benefits
+    - taxable_disability_benefits
     - sc_net_capital_gain_deduction
     - sc_529_plan_deduction
     - us_govt_interest
@@ -23,7 +23,7 @@ values:
   # H.4216 adds the SCIAD starting 2026
   2026-01-01:
     - salt_refund_income
-    - disability_benefits
+    - taxable_disability_benefits
     - sc_net_capital_gain_deduction
     - sc_529_plan_deduction
     - us_govt_interest

diff --git a/...gine_us/parameters/gov/states/wi/tax/income/subtractions/disability_income/age_limit.yaml b/...gine_us/parameters/gov/states/wi/tax/income/subtractions/disability_income/age_limit.yaml
@@ -0,0 +1,12 @@
+description: Wisconsin allows the disability income exclusion to people under this age at the end of the year.
+values:
+  2021-01-01: 65
+metadata:
+  unit: year
+  period: year
+  label: Wisconsin disability income exclusion age limit
+  reference:
+    - title: 2022 Wisconsin Schedule 2440W instructions, Who Can Exclude Disability Income
+      href: https://www.revenue.wi.gov/TaxForms2022/2022-Schedule2440Wf.pdf#page=2
+    - title: 2024 Wisconsin Schedule 2440W instructions, Who Can Exclude Disability Income
+      href: https://www.revenue.wi.gov/TaxForms2024/2024-Schedule2440Wf.pdf#page=2
Original file line number	Diff line number	Diff line change
		@@ -0,0 +1 @@
		Count the taxable part of employment disability benefits in federal gross income (IRC 105(a)), with a new tax_exempt_disability_benefits input for benefits from plans the recipient paid for (IRC 104(a)(3)); count disability pensions received before minimum retirement age as earned income when entered; limit state disability subtractions to the taxable part; exclude disability benefits from Pennsylvania taxable compensation; and add the Wisconsin, New York, Iowa and Indiana disability income exclusions for people retired on permanent and total disability.