- Learn about the increased standard deduction.
- Find out if you receive tax-exempt income.
- Discover impairment-related work expenses eligible for deductions.
- What does the term financially disabled mean?
- Learn how the Earned Income Tax Credit can help disabled taxpayers.
- Discover how the child or dependent care credit can help parents and caregivers.
- Learn about special medical deductions.
- Find valuable information regarding qualified Medicaid waiver payments.
- Learn more about ABLE Accounts.
Disabled taxpayers and parents of disabled children may qualify for a number of tax credits and other tax benefits. Are you or someone listed on your federal tax return disabled? Listed below, Fiducial has several tax credits and other available benefits that may help you.
Increased standard deduction for disabled taxpayers
Since a change in the law more than 35 years ago, legally blind taxpayers (or spouses when filing a joint return) have been eligible for a standard deduction add-on. Thus, for 2021, if a taxpayer files jointly with a blind spouse, they may add an additional $1,350 to their standard deduction of $25,100. If both spouses are blind, the add-on doubles to $2,700.
For other filing statuses, the additional amount equals $1,700. Being age 65 or older isn’t a disability. However, it should be noted that there is an “elderly” add-on to the standard deduction of $1,350 or $1,700. This depends on the filing status. These add-ons apply only to the taxpayer and spouse, not to dependents.
Exclusions from Gross Income
The IRS excludes certain disability-related payments, Veterans Administration disability benefits, and Supplemental Security Income gross income (i.e., not taxable). They treat amounts received for Social Security disability the same as regular Social Security benefits. This means that taxable benefits could equal up to 85%. This depends on the amount of the recipient’s (and spouse’s, if filing jointly) other income.
Impairment-related work expenses for disabled taxpayers
Taxpayers with a physical or mental disability may deduct impairment-related expenses paid to allow them to work.
- Employees – The 2017 tax reform eliminated most miscellaneous itemized deductions. However, it retained the deduction for employees who have a physical or mental disability limiting their employment. As a result, they can still deduct the expenses necessary for them to work as an itemized deduction.
- Self-employed – Self-employed individuals may deduct impairment-related expenses on Schedule C or F.
Impairment-related work expenses are ordinary, necessary business expenses for attendant care services at the individual’s place of work. This includes other expenses in the workplace that are necessary for the individual to be able to work. An example is when a blind taxpayer pays someone to read work-related documents to them.
Normally, one must file a claim for a refund within 3 years of the unextended due date of the return. For example, for a 2018 tax return, the due date was April 15, 2019. The clock starts running at this point. Thus, the IRS will not issue refunds for an amended 2018 or a late-filed original 2018 return submitted after April 15, 2022. However, if a taxpayer qualifies as “financially disabled,” the rules change. If the IRS considers the individual financially disabled, they suspend the time period for claiming a refund for the period during which the financial disability applies.
What does being financially disabled mean? Financially disabled taxpayers cannot manage their financial affairs because of a medically determinable physical or mental impairment. This impairment can likely result in death or has lasted or could last for a continuous period of not less than 12 months.
For a joint income tax return, only one spouse has to be a financially disabled taxpayer for the time period to qualify as suspended. However, financial disability does not apply during any period when the individual’s spouse or any other person is authorized to act on the individual’s behalf in financial matters.
Earned Income Tax Credit (EITC) for disabled taxpayers
The EITC is available to disabled taxpayers and the parents of a child with a disability. This holds even when the child’s age would normally prevent the child from being a qualifying child. To be eligible for the credit, the taxpayer must receive earned income, which generally means wages or self-employment income. However, if an individual has retired on disability, the IRS considers taxable benefits received under their employer’s disability retirement plan earned income until the individual reaches minimum retirement age.
If the IRS considers the disability benefits nontaxable, such as when the disabled individual paid the premiums for the disability insurance policy from which the benefits come, then the benefits do not qualify as earned income. The EITC tax credit does not just reduce a taxpayer’s tax liability. It may also result in a refund. Many working, disabled taxpayers who have no qualifying children may qualify for the EITC.
If a taxpayer’s child is disabled, the qualifying child’s age limitation for the EITC is waived.
The EITC has no effect on certain public benefits. The IRS does not consider any refund received because of the EITC income when determining whether a taxpayer meets eligibility requirements for benefit programs such as Supplemental Security Income and Medicaid.
Child or Dependent Care Credit
Taxpayers who pay someone to come to their home and care for their dependent or disabled spouse could claim this credit. For children, this credit is usually limited to the care expenses paid only until age 13, but there is no age limit if the child is unable to care for themselves.
Special Medical Deductions When Claiming Itemized Deductions
In addition to conventional medical deductions, the tax code provides special medical deductions related to disabled taxpayers and dependents.
- impairment-related Expenses – Have you paid for special equipment or improvements installed in your home? These expenses may count as medical expenses deductible as part of itemized deductions if the main purpose of said improvements serves as medical care for the taxpayer, the spouse, or a dependent. The cost of permanent improvements that increase the value of the property, however, may only partially count towards medical expenses.
- Learning Disability – Tuition paid to a special school for a child with severe learning disabilities caused by mental or physical impairments, including nervous system disorders, can count as medical expenses eligible for the medical deduction when itemizing deductions. A doctor must recommend that the child attend the school. Fees for the child’s tutoring recommended by a doctor and given by a teacher specially trained and qualified to work with children who have severe learning disabilities might also be included.
- Drug Addiction – Amounts paid by a taxpayer to maintain a dependent in a therapeutic center for drug addicts. This includes the cost of the dependent’s meals and lodging, which qualify as medical expenses for itemized deduction purposes.
- Other Medical Expenses – Here are some other medical expenses that apply to individuals with disabilities:
o Expenses for Braille books and magazines that exceed the price of regular printed editions.
o Cost of a wheelchair is used mainly for the relief of sickness or disability, not just to provide transportation to and from work, including the cost of operating and maintaining the wheelchair.
o Expense and associated care costs of a guide dog or other animal aiding a person with a physical disability.
o The expense of artificial limbs and hearing aids.
Exclusion of Qualified Medicaid Waiver Payments
Payments made to care providers caring for related individuals in the provider’s home are excluded from the care provider’s income. However, they must meet certain requirements to be considered foster care payments.
Even so, the nontaxable income may qualify as earned income for purposes of the care provider claiming the earned income tax credit. Qualified foster care payments are amounts paid under a state’s foster care program (or political subdivision of a state or a qualified foster care placement agency). For more information, please call your Fiducial representative.
Qualified ABLE programs provide a way for individuals and families to contribute and save for the purpose of supporting individuals with disabilities in maintaining their health, independence, and quality of life.
Federal law authorizes states to establish and operate ABLE programs. Under these programs, an ABLE account may be set up for any eligible state resident – someone who became severely disabled before turning 26 – who would generally be the only person who could take distributions from the account. ABLE accounts are very similar in function to Sec. 529 plans. The main purpose of ABLE accounts is to shelter assets from the means of testing required by government benefit programs.
Individuals can contribute to ABLE accounts, subject to per-account gift tax limitations (maximum $16,000 for 2022, up from $15,000, which it has been for several years). For years 2018 through 2025, working individuals who are beneficiaries of ABLE accounts are allowed to contribute limited additional amounts to their ABLE accounts, and these contributions can be eligible for the nonrefundable saver’s credit.
Distributions to the disabled individual are tax-free if the funds are used for qualified expenses of the disabled individual.