The taxable portion of any of your pension is based on if the payment is for years of service or the disabled condition.
26 U.S.C. 104(a) provides: "Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include -
(1) amounts received under workmen's compensation acts as compensation for personal injuries or sickness; ***."
However, 26 C.F.R. 1.104-1(b) provides that 26 U.S.C. 104(a)(1) does not exclude as income "***a retirement pension or annuity to the extent that it is determined by reference to the employee's age or length of service, or the employees prior contributions, even though the employee's retirement is occasioned by an occupational injury or sickness."
In addition, the exclusion "*** does not apply to amounts which are received as compensation for a nonoccupational injury or sickness to the extent that they are in excess of the amount provided in the applicable workmen's compensation act or acts. ***."
The portion of your disability benefit that is based on your service will be taxable if your benefit is determined to be in the line-of-duty. After you reach retirement age you can then begin to count your cost into the pension.