How to Claim the Disability Tax Credit

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Nobody likes paying taxes, but smart tax planning eases the pain. Tax credits are incredibly valuable because they directly reduce or lower the amount of taxes we may have to pay the Internal Revenue Service (IRS) at the end of the year. Some of the more common credits are the Earned Income Credit (EIC) and Child Care Credit.

Are you disabled or handicapped and unable to work? If so, there's another tax credit that you may qualify for. It's called the Disability Tax Credit. It can have a significant impact on your tax bill. There are several limits on the credit, ranging from what qualifies as a "disability" to how much you can claim. If you're unable to work because of a disability, you should look into the credit before you file your tax return.

Residency Requirements

To claim the credit, you have to be either a US citizen or a resident alien. While there are some exceptions, you usually can't take the credit if you're a nonresident alien at anytime during the tax year.

Age & Disability Requirements

You have to be under 65 years old at the end of the tax year to qualify. You're considered to be age 65 on the day before your 65th birthday. If you're born on January 1, 1946, you'll be treated as 65 years old at the end of 2010.

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 an employer
  • Under the mandatory retirement age, meaning the age set by your employer for retirement

Even if you don't formally retire, you can still qualify for the credit if you stop working because of your disability or handicap.

A permanent and total disability means that you can't engage in or perform any "substantial gainful activity" because of a physical or mental condition. 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 hobbies. Generally, a doctor has to certify that your physical or mental condition can result in death or has lasted or can be expected to last for a continuous 12-month period.

Income Limitations

Even if you satisfy the other requirements, you can claim the credit only if your income is below a certain level. This level is based upon your adjusted gross income (AGI) or your non-taxable benefits, like Social Security and pension payments. You can't take the credit if:

  • Single, head of household or a qualifying widow - your AGI is $17,500 or more, or your non-taxable benefits are $5,000 or more
  • Married filing jointly and you and your wife satisfy the other requirements - your AGI is $25,000 or more, or your non-taxable benefits are $7,500 or more
  • Married filing jointly and you only satisfy the other requirements - your AGI is $20,000 or more, or your non-taxable benefits are $5,000 or more
  • Married filing separately - your AGI is $12,500 or more, or your non-taxable benefits are $3,750 or more

Computing Your Credit

Figuring out the amount of your credit is a multi-step process that can get complicated. The IRS has detailed information and worksheets to help you. The IRS will also calculate your credit if you ask for the help. Generally, you figure out the amount of your credit by:

  • (Step 1) Determining your initial amount, which is either $7,500, $5,000 or $3,750. This number is based upon your filing status, AGI and non-taxable benefits.
  • (Step 2) Figuring your non-taxable benefits, such as Social Security retirement and disability benefits and Tier I Railroad Retirement benefits.
  • (Step 3) Taking your AGI and (1) subtract from that $7,500 if you're filing single, head of household or qualifying widow; subtract $10,000 if married filing jointly; subtract $5,000 if you're married filing separately and you don't live with your spouse. Divide that result by 2.
  • (Step 4) Adding Steps 2 and 3 together. If that sum is equal to or more than Step 1, you can't take the credit. If it's less, you can take the credit.
  • (Step 5) Subtract the Step 4 number from Step 1. Multiply the result by 15% to determine your credit.

Generally, the amount of credit is limited to the amount of the taxes you owe. If your credit is more than the taxes you owe, you can't claim a refund for the difference. For example, say you owe $500 in taxes, but your disability credit is $600. You may claim the $500 credit, which will lower your tax bill to $0. You can't claim a refund for $100 ($600 credit minus $500 taxes owed).

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.

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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