Was it taken out before tax or after tax? You need to find out from your wife's paystub?
I think in most case it should be after tax deduction.
Hence the disability payments received by her will not be taxable.
Let me know if you have any question.
Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.
Certified Public Accountant (CPA)
MBA, CPA