Will the IRS tax my disability?

Question

I've been receiving temporary state disability for the past year, and as you know that is not taxable income. However I received a letter stating that my disability payments will be reported to the IRS. When I contacted the disability office they said there is some rule that if you collected unemployment and disability in the same calendar year then your disability is taxed. However even though I had an open unemployment claim, I didn't get one penny of unemployment in 2024. They said that's a very valid argument but one that I would have to take up with the IRS. I would hate to lose thousands of dollars over some ridiculous technicality. Is there anything I can do? Thanks for your time.

James L. Arrasmith · Answer

Your state disability benefits are generally not taxable if they come from a state welfare fund and you didn't get any employer contributions. The fact that you had an open unemployment claim but received no payments shouldn't trigger taxation of your disability benefits. 
 
Since you have documentation showing you received zero unemployment payments in 2024, you should gather these records along with your disability payment statements. When you file your taxes, report only the actual income you received - if you got no unemployment payments, there's nothing to report from unemployment. 
 
If the IRS questions this later, you can request a tax advocate through the Taxpayer Advocate Service to help resolve the issue. You might also want to include a brief written explanation with your tax return noting that while you had an open claim, you received no unemployment benefits in 2024. Consider consulting a tax preparer who can review your specific situation and help ensure everything is filed correctly.

Q: Will the IRS tax my disability?