Taxation

How to Claim the Disability Tax Credit

By Stephen Fishman, J.D., University of Southern California Law School | Reviewed By Diana Fitzpatrick, J.D., NYU School of Law

Talk to a Local Income Tax Attorney

Nobody likes paying taxes, but smart tax planning eases the pain. One of the smartest tax planning steps you can take is to take advantage of all the tax credits available to you. Tax credits are incredibly valuable because, unlike tax deductions which only reduce your taxable income, a credit directly reduces the amount of taxes you have to pay the IRS. For example, a $1,000 credit will reduce your taxes by $1,000.

If you’re unable to work because you are disabled or handicapped and are receiving a disability pension or income from a former employer, you should look into the disability tax credit. However, because the income limitations on eligibility for this credit have not been adjusted since 1983, relatively few disabled people can qualify for it.

Age & Disability Requirements

There are certain requirements you must meet in order to qualify for the disability tax credit. First, you have to be under 65 years old at the end of the tax year. You're considered to be age 65 on the day before your 65th birthday. If you're born on January 1, 1951, you'll be treated as 65 years old at the end of 2015.

In addition to being under the age of 65, you must be:

  • retired with a permanent and a total disability
  • receiving disability income or payments from a former employer, and
  • under the mandatory retirement age, meaning the age set by your employer for retirement.

Permanent and Total Disability

A permanent and total disability means that you can't perform any substantial gainful activity because of a physical or mental condition. This condition must: (1) be expected to result in death, (2) have lasted for at least 12 continuous months, or (3) be expected to last for at least 12 continuous months future months.

Substantial gainful activities are tasks or duties that you do for pay. It doesn't include things that you do to care for yourself, like bathing or getting dressed. It also doesn't include things you do for free, like engaging in hobbies, attending school or social programs, or going to clubs. Even if you don't formally retire, you can still qualify for the credit if you stopped working because of your disability or handicap.

For the first year you claim the credit, a doctor has to certify that you were permanently and totally disabled on the date you retired. You don’t need to file this certification with your tax return, just keep it with your records. IRS Schedule R, Credit for the Elderly or Disabled, has a certification statement your doctor can sign. You only need to obtain this certification once.

Disability Income

You must have taxable disability income to qualify for the disability credit. This is income paid under a former employer’s accident, health, or pension plan. This income is taxed the same as the wages you earned while working for your employer. Disability income doesn’t include payments not related to your disability—for example, withdrawals you make from your employer’s 401(k) plan.

Income Limitations

The disability tax credit is intended for people with very modest incomes. Thus, even if you satisfy the other requirements, you can’t claim the credit if your income exceeds a specific threshold. This threshold is based upon your adjusted gross income (AGI) or your non-taxable benefits, like Social Security and pension payments. Your AGI is your total income minus certain adjustments for items like moving expenses, health insurance payments by the self-employed, student loan interest, IRA contributions, and alimony. It is the amount you report on line 38 of your Form 1040, or line 22 of Form 1040A.

The income limitations for taking the credit based on tax filing status are as follows:

  • For a single person, head of household, or a qualifying widow: AGI of $17,500 or more, or non-taxable benefits of $5,000 or more
  • For married people filing jointly, where both spouses satisfy certain other requirements: AGI of $25,000 or more, or non-taxable benefits of $7,500 or more
  • For married people filing jointly, and only one spouse satisfies certain other requirements: AGI of $20,000 or more, or non-taxable benefits of $5,000 or more
  • For married people filing separately: AGI of $12,500 or more, or non-taxable benefits of $3,750 or more.

These income limitations have not been adjusted for inflation since 1983. They are now so low they make it impossible for most disabled people to qualify for the disabled tax credit.

Figuring Your Credit

Figuring out the amount of your credit is a multi-step process that can get complicated. This is something that a tax preparer can do for you. Of, if you prepare your return yourself, you may wish to use tax preparation software that can automatically compute your credit.

You can also ask the IRS to compute your credit for your (you can trust them to do this, they are not out to cheat you). To do so, attach Schedule R to your return. Check the appropriate box in Part I of Schedule R and fill in Part II and lines 11, 13a, and 13b of Part III, if they apply to you. If you file Form 1040A, enter “CFE” in the space to the left of Form 1040A, line 32. If you file Form 1040, check box c on Form 1040, line 54, and enter “CFE” on the line next to that box.

If you want to compute your credit yourself with paper and pencil, the IRS has detailed information and worksheets to help you in Publication 524, Credit for the Elderly or the Disabled.

Unfortunately, the amount of the disability tax credit is quite modest. For example, a single individual with $11,400 in disability income would qualify for a $121 credit.

Generally, the amount of credit is limited to the amount of the taxes you owe. Thus, you get no credit at all if you owe no taxes for the year. Moreover, if your credit is more than the taxes you owe for the year, you can't claim a refund for the difference. For example, if you owe $100 in taxes, but your disability credit is $200, you may claim a $100 credit, which will lower your tax bill to $0. But you can't claim a refund for the remaining $100 ($200 credit minus $100 taxes owed).

If You’re Over 65

If you're over 65 years old, you might qualify for the Elderly Credit. Generally, you figure out the amount of this credit the same way as the disability credit. The main difference is that there's no disability requirement. For details, see IRS Publication 524, Credit for the Elderly or the Disabled.

Questions for Your Attorney

  • If I'm disabled for purposes of state disability benefits, am I disabled for purposes of the federal tax credit?
  • My wife and I both qualify for the disability tax credit. Can we file separately? Should we?
  • Should I let the IRS figure out my credit? If I do, what can I do if I don't agree with the determination?

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