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Disability Tax Credit: Who is Eligible for Disability Deductions?

Disability Tax Credit
June 18 2019 •
Retirement

Disability Tax Credit: Who is Eligible for Disability Deductions?

If you’re disabled, you may qualify for several tax credits and tax deductions. According to 2018 data from The Centers for Disease Control, 1 in 4 adults (roughly 61 million Americans) has a disability that impacts major life activities. Some of these Americans are currently working, while others rely on support from caregivers to navigate day-to-day tasks.

In either case, living with a disability can be expensive. The costs of prescription medicines, physical therapy, medical bills, retrofitted home modifications, professional help, and more are all factors that contribute to a heavy financial burden.

To offset these expenses, the U.S. tax code allows people with disabilities to deduct some of these costs on their annual tax return. To see if you’re eligible for disability deductions or a disability credit, you can refer to our tax preparation services or continue reading to learn more.

How does disability tax credit work?

Before we dive into the various disability deductions and credits you may be eligible for, it’s important to know the difference between a tax credit vs deduction. A tax credit is a type of tax incentive that reduces the amount of taxes you owe, dollar-for-dollar. A tax credit is deducted from your tax liability, which is the amount of money you owe to the IRS. For example, if you owe $3,000 in taxes and qualify for a $1,000 disability tax credit, the applied tax credit would reduce your tax liability to $2,000.

On the other hand, a disability tax deduction lowers your annual taxable income based on your highest federal income tax bracket. For example, say you qualify for a $1,000 deduction and fall within the 2019 tax bracket that pays a 32% tax rate; you’ll see a $340 reduction on your taxes.

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Who is eligible for disability deductions?

In order to qualify for a disability tax deduction, you must first meet the IRS’s definition of “permanent and total disability.” The IRS defines permanent and total disability as:

  • Someone who can’t engage in any substantial, gainful activity because of a physical or mental condition
  • A qualified physician determines that the condition has lasted or can be expected to last continuously for at least a year, or can be expected to result in death

If a disabled taxpayer falls under one of these categories, they may be eligible for disability deductions including:

Standard Deduction

If you are legally blind or over the age of 65, you may be entitled to a higher Standard Deduction on your tax return. The Standard Deduction is the dollar amount that reduces your taxable income. This option is beneficial because it doesn’t require taxpayers to itemized deductions, such as exact bills from medical expenses. Information on the Standard Deduction can be found in IRS Publication 501.

Itemized Deductions

On IRS Form 1040, Schedule A, you can deduct expenses for medical and dental care. However, you can only deduct the amount of your total medical expenses that exceed 7.5% of your adjusted gross income. Some examples of deductible medical expenses include (but aren’t limited to) the following:

  • Payments of fees to doctors, surgeons, dentists, and psychiatrists
  • Payments for inpatient hospital care
  • Payments for insulin and other prescribed drugs
  • Payments for admission and transportation to a medical conference relating to chronic illness of you, your spouse, or dependent
  • Payments for insurance premiums

ABLE Account

The Achieving a Better Life Experience (ABLE) Act of 2014 was enacted to help blind and disabled people save money to maintain health, independence, and quality of life. With these accounts, the account beneficiary, family, and friends can make contributions using post-taxed dollars. Although not a tax deduction, ABLE money will grow in the account without being taxed, providing disability relief. To open an ABLE account, the onset of your disability must have occurred before turning 26 years old.

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How to apply for a disability tax credit

In addition to tax deductions, many Americans are also eligible for disability credits that reduce their overall tax obligation. They’ll need to apply for each credit individually, each of which instructions vary slightly. Below are some common tax credits that disabled people may be eligible for, as well as steps on how to apply:

The Credit for the Elderly or Disabled

The Credit for the Elderly or Disabled is a tax credit for candidates who are:

  • Aged 65 or older; or
  • Retired on permanent and total disability and received taxable disability income for the tax year; and
  • With an adjusted gross income; or
  • the total of nontaxable Social Security, pensions annuities or disability income under specific limits

To claim this credit, you must meet these criteria and complete Form 1040, Schedule R. This credit can take up to $7,500 off your tax bill depending on your adjusted gross income.

The Child and Dependent Care Credit

If you are the parent or caregiver of a child or dependent with a disability, you may be eligible for the Child and Dependent Care Tax Credit (CDCTC). For a disabled dependent, the total expenses that you may use to calculate the credit may not be more than $3,000 for one qualifying individual or $6,000 for two or more qualifying individuals.  A qualifying individual for the CDCTC must be:

  • Under the age of 13 when care was provided
  • Your spouse who is physically or mentally unable of self-care and has lived with you for more than half of the year
  • An individual who is physically or mentally unable of self-care and has lived with you for more than half of the year

The Adopted Child Credit

Parents who adopt a child that is a U.S. resident with special needs are eligible for an adoption credit. This credit is worth up to $13,460 per child in the year the adoption was finalized but is dependent on income.

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The Earned Income Tax Credit

The Earned Income Tax Credit (EITC) is an income tax that benefits workers who earn low to moderate income. IRS Notice 797 is sent to people who may qualify for the EITC and informs recipients they could be eligible for this substantial federal tax refund. The amount of the EITC depends on your income and how many children you count as dependents. In 2018, the EITC can be as high as:

  • $3,400 with one qualifying child
  • $5,616 with two qualifying children
  • $6,318 with three or more qualifying children
  • $510 with no qualifying children

For disabled individuals who work but have a low income, and parents with dependents who have disabilities, may also be eligible for the EITC. The EITC is a refundable credit, which means if the credit is more than your tax liability, the IRS will send you the balance of the money. To determine your eligibility for the EITC, consult with a Community Tax professional.

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The Bottom Line

Disability tax deductions and disability tax credits give millions of Americans financial relief to offset the cost of living with a disability. From medications to doctors, expensive treatments and more, living with a disability is extremely expensive. To find out which IRS credits and deductions you may be eligible for, contact our professional tax experts who can help you get more from your tax return, keeping more money in your pocket.