With tax season upon us, we are all looking for ways to reduce our tax liability. Tax filers who are disabled will find a number of tax credits, income exclusions and deductions that can ease their tax burden a bit.
But you might not be aware that such breaks exist. “These aspects of the law are not properly explained to taxpayers,” said Jody Padar, a certified public accountant and CEO of New Vision CPA Group in Mt. Prospect, Ill.
As a result, many taxpayers overlook such breaks initially and have to file amended returns later, Padar said. However, you can avoid this hassle by educating yourself about the credits and deductions available to disabled tax filers.
Before we get to the money-saving ideas, it is important to define three key terms:
- Tax credit — A direct reduction in tax liability.
- Deduction — Reduces the amount of income used to calculate one’s tax liability.
- Exclusion from income — Means that an item is not included when calculating your income for tax purposes.
With that jargon out of the way, here are 10 credits, deductions and income exclusions that disabled tax filers should consider:
1. Credit for the Elderly or Disabled
This credit can put an extra $5,000 in your pocket, or up to $7,500 if you are married. To qualify for this credit, you must be either elderly or disabled.
The rules differ depending on whether you are 65 or older, or younger than that. To qualify for the credit based on your age, you must reach age 65 by the end of the tax year for which you are filing — in this case, 2015.
If you are younger than 65, you can still get a credit if you meet the disability portion. To qualify, you must meet all three of the following conditions:
- Be retired on permanent or total disability.
- Received taxable disability income for the 2015 tax year.
- Had not reached the mandatory retirement age as of Jan. 1, 2015.
You can find more information on this credit at the IRS website.
2. Earned Income Tax Credit
The earned income tax credit is a refundable tax credit for low-to-moderate-income working individuals and couples, particularly those with children.
According to the IRS, the credit is intended to help people make ends meet, and it put more than $66 billion into the pockets of almost 28 million individuals and families last year. “The EITC is a refundable tax credit. This means workers may get money back, even if they have no tax withheld,” states the IRS.
Some disability retirement benefits qualify as earned income when claiming the credit, according to the IRS. The IRS goes on to note that “you may claim a relative of any age as a qualifying child if the relative is totally and permanently disabled and fits all other EITC requirements.”
The IRS categorizes disability retirement benefits as earned income until you reach minimum retirement age. That is defined as the earliest age you could have received a pension or annuity if you did not have the disability. Once you reach minimum retirement age, disability payments are considered to be your pension and not earned income.
3. Child and Dependent Care Credit
The child and dependent care credit covers expenses paid for the care of a qualifying individual, including those with physical and mental disabilities.
For example, the IRS says a qualifying individual includes:
- “Your dependent qualifying child who is under age 13 when the care is provided.
- Your spouse who is physically or mentally incapable of self-care and lived with you for more than half of the year.
- An individual who is physically or mentally incapable of self-care, lived with you for more than half of the year, and either: (i) is your dependent; or (ii) could have been your dependent except that he or she has gross income that equals or exceeds the exemption amount, or files a joint return, or you (or your spouse, if filing jointly) could have been claimed as a dependent on another taxpayer’s 2015 return.”
The expenses used to calculate the credit are $3,000 for one qualifying individual or $6,000 for two or more qualifying individuals. Like all credits and tax breaks, you need to understand the ins and outs of what types of expenses qualify and what records need to be kept.
A tax professional can help you craft the best tax strategy for your circumstances.
4. Adoption Credit
The IRS says tax filers who have adopted a U.S. child with special needs — as determined by the taxpayer’s state — typically are eligible for an adoption credit in the year the adoption becomes final.
According to the IRS: “Thus, if the adoption of a child whom a state has determined has special needs becomes final in 2015, the maximum credit allowable generally would be $13,400. However, the maximum amount will be reduced by any qualified adoption expenses you claimed for the same child in a prior year or years, and the MAGI limitation may apply.”
“MAGI” refers to “modified adjusted gross income.” Taxpayers looking to claim this credit need to meet MAGI requirements. Consult your tax professional for more information.
It is important to understand whether or not the adoption of your child qualifies you to be eligible for this credit. Again, it may be wise to consult with a tax professional.
5. Increased Standard Deduction
If you are legally blind, you are entitled to claim a higher standard deduction on your tax return.
According to efile.com, “If you are legally blind, you may increase your standard deduction by $1,550 if filing single or head-of-household. If you are married filing jointly and you or your spouse is blind, you may increase your standard deduction by $1,200.”
Efile also says you may increase your standard deduction by $2,400 if both you and your spouse are blind.
To qualify as blind, the IRS says you must keep in your tax records a certified letter from an eye doctor or optometrist that states “you have noncorrectable 20/200 vision in your best eye or that your field of vision is restricted to 20 degrees or less,” according to efile.
6. Exclusions From Income: Military and Governmental Pensions
Certain military and government disability payments can be excluded from taxable income. The IRS states:
“You may be able to exclude from income amounts you receive as a pension, annuity, or similar allowance for personal injury or sickness resulting from active service in one of the following government services:
- The armed forces of any country
- The National Oceanic and Atmospheric Administration
- The Public Health Service
- The Foreign Service.”
There are many conditions attached to the exclusion, and you can find them in Publication 525.
7. Other Exclusions From Income
There are a number of other payments related to your disability that are not taxable, according to the IRS. They include:
- “Benefit payments from a public welfare fund, such as payments due to blindness.
- Workers’ compensation for an occupational sickness or injury if paid under a workers’ compensation act or similar law.
- Compensatory (but not punitive) damages for physical injury or physical sickness.
- Disability benefits under a ‘no-fault’ car insurance policy for loss of income or earning capacity as a result of injuries.
- Compensation for permanent loss or loss of use of a part or function of your body, or for your permanent disfigurement.”
8. Disabled Dependent Medical Expense Deduction
Medical expenses related to the care of a disabled dependent can be included in the calculation of the medical expense deduction. According to the IRS, “You can include medical expenses you paid for your dependent. For you to include these expenses, the person must have been your dependent either at the time the medical services were provided or at the time you paid the expenses.”
9. Disabled Access Credit
This credit is available to small businesses that incur expenditures for the purpose of employing and giving access to disabled workers. According to the IRS, “an eligible small business is one that that earned $1 million or less or had no more than 30 full-time employees in the previous year; they may take the credit each and every year they incur access expenditures.”
Note this is a tax credit for the business entity and not directly for disabled tax filers.
10. Work Opportunity Credit
Like the Disabled Access Credit, this is another tax break available to businesses.
According to the IRS, “The Work Opportunity Credit provides eligible employers with a tax credit up to 40 percent of the first $6,000 of first-year wages of a new employee if the employee is part of a ‘targeted group.’ An employee with a disability is one of the targeted groups for the Work Opportunity Credit, provided the appropriate government agencies have certified the employee as disabled. The credit is available to the employer once the employee has worked for at least 120 hours or 90 days.”
Related: What to Do If You Lost Your W-2
The More You Know, the Less You Owe
There are a number of income tax credits, deductions and exclusions from income that can benefit disabled tax filers, their parents and caregivers, and companies that hire them.
In recent years, family support groups and other organizations responsible for educating taxpayers about these tax breaks have not had the resources to get word out, Padar said.
“Tragically, many of these resources have had their funding curtailed or totally eliminated,” she said.
However, if you do a little research on your own — and talk to a qualified tax professional — you may be able to trim your obligation to Uncle Sam this tax season.