Tax Newsletter

Tax Credit for the Elderly and Disabled

Certain elderly and/or disabled taxpayers may be entitled to a tax credit when filing their federal income tax return. A tax credit can be deducted from the amount of federal income tax owed, as opposed to a tax deduction, which reduces the amount of income subject to tax. A tax credit is thus often more beneficial than a tax deduction, as a tax credit results in a dollar-for-dollar reduction in the amount of tax owed.

Eligibility for the Credit

To claim the credit, the taxpayer must be a “qualified individual” with income less than specified amounts, depending on filing status. A qualified individual must be a U.S. citizen or resident, subject to some exceptions (non-U.S. citizens may be able to take the credit if married to a U.S. citizen or permanent resident, provided the couple elects to treat the non-citizen as a U.S. resident. This election will subject the couple to taxation on their worldwide income.) The qualified individual must also be:

• Age 65 or older at the end of the tax year (persons are considered 65 on the day before their 65th birthday); or
• Under age 65, but retired and on permanent and total disability, receiving taxable disability income during the tax year, and, as of January 1 of the tax year, have not yet reached “mandatory retirement age,” which is the age set by the taxpayer’s employer at which the taxpayer would have had to retire, absent the disability.

Generally, married taxpayers must file a joint return to take the credit, unless they did not live in the same household at any time during the tax year (then they may file jointly or separately and still take the credit). Another exception to the joint return rule is that the taxpayer may file as “head of household” and take the credit, even though the taxpayer’s spouse lived in the same household during the first six months of the tax year, provided certain conditions are met.

Disabled Taxpayer Qualifications

The taxpayer must have been permanently and totally disabled when retired and must be receiving disability income before the end of the tax year. To be permanently and totally disabled, the taxpayer must not be able to engage in any “substantial gainful activity” because of a physical or mental condition. A physician must certify that the condition has lasted, or can be expected to last, continuously for 12 months or more, or can be expected to result in death.

The Internal Revenue Service (IRS) defines substantial gainful activity as the performance of significant duties over a reasonable period of time, while working for pay or profit. Full or part-time work done at an employer’s convenience in a competitive work situation for at least minimum wage conclusively shows to the IRS that the taxpayer is able to engage in substantial gainful activity, jeopardizing the tax credit.

Work by taxpayers to care for themselves or their homes is not considered substantial activity. Participating in hobbies, clubs, schooling, therapy, training, and similar activities are not considered substantial gainful activity. However, engaging in such activities may show that the individual is capable of engaging in substantial gainful activity.

Calculating the Credit

Tax law provides an “initial amount” for the credit, depending on the taxpayer’s filing status, e.g., single, head of household, married filing separately, or married filing jointly. This amount is subject to deductions for nontaxable Social Security and other nontaxable payments received that year, as well as “excess adjusted gross income.” The resulting sum is multiplied by 15% to determine the potential credit amount.

Limitations

• The credit may be unavailable or reduced if:
• The amount of the credit is more than the taxpayer’s tax liability.
• The taxpayer is claiming a credit for child and dependent care expenses.
• For disabled taxpayers under age 65, the initial amount is more than the taxpayer’s taxable disability income.
• The sum of the non-taxable income and excess adjusted gross income exceeds the initial credit amount.

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