Mt. Fuji in autumn

 

Who Can Take the Tax Credit for the Elderly or the Disabled?

If you're age 65 or older and meet certain income requirements, you may be able to claim the tax credit for the elderly or the disabled. If you're under age 65, retired on permanent and total disability, and received taxable disability income during the year, you may also be eligible for this credit. The maximum credit available is $1,125.

To claim this federal income tax credit, you must meet two criteria:

  • You must be a qualified individual
  • Your income must fall below specified limits

Tip: A tax credit represents a dollar-for-dollar reduction of your income tax liability. A deduction, in contrast, only reduces your taxable income.

Who Is a Qualified Individual?

The guidelines you must meet in order to be considered a qualified individual are detailed in IRS Publication 524.

You Must Be A U.S. Citizen or Resident

To claim this credit, you must be a U.S. citizen or resident alien. Generally, you cannot take this credit if you were a nonresident alien at any point in the tax year.

There are two exceptions to this general rule. You may be eligible for the credit if:

  • You are a nonresident alien married to a U.S. citizen or resident at the end of the tax year, or
  • You were a nonresident alien and you are married to a current nonresident alien, but you became a resident by the end of the tax year

If either is the case, you and your spouse may choose to be treated as U.S. residents for the whole year. If you make this choice, you and your spouse must file a joint return for that tax year (you can file either jointly or separately thereafter) and you both will be taxed on your worldwide incomes.

Particular Considerations for Married Persons

If you're married at the end of the tax year, you and your spouse must file a joint return in order to qualify for this credit. If you and your spouse lived apart the entire tax year, you have the option of filing either a joint return or separate returns.

You can file as head of household and still qualify, even if your spouse lived with you during the first six months of the tax year, if:

  • You file a separate return
  • You paid more than half the cost of maintaining your home during the tax year
  • Your spouse didn't live in your home at any time during the last six months of the tax year
  • For more than half the tax year, your home was your child's, stepchild's, adopted child's, or foster child's primary home
  • You claim the child as a dependent, or you can't claim the child as a dependent because:
  1. You permit your spouse to claim the child as a dependent by your written declaration, or
  2. Your spouse provided at least $600 for the child's support and can claim the child as a dependent under a qualified pre-1985 agreement

At the End of the Tax Year You Must Be Either (1) Age 65 or Older, or (2) Under Age 65 and Retired on Permanent and Total Disability

You are considered to be age 65 on the day before your 65th birthday. If you're under age 65 at the end of the year, you can only qualify for the credit if you retired on permanent and total disability, and have taxable disability income for the year. The IRS may consider you to have retired on disability as of the date you stopped working because of your disability.

The IRS considers you permanently and totally disabled if (1) you can't engage in any "substantial gainful activity" due to either your physical or mental condition, and (2) you submit a physician's statement certifying that you are permanently and totally disabled and that your condition has lasted or can be expected to last continuously for 12 months or more, or that the condition can be expected to result in death.

Substantial gainful activity: You are engaged in substantial gainful activity if you perform significant duties over a reasonable time while working for pay or profit or doing work usually done for pay or profit. Working full-time (or part-time at your employer's convenience) in a competitive work situation for at least minimum wage is conclusive evidence that you can engage in a substantial gainful activity.

Caution: Don't simply assume that, if you're not working, you can't engage in substantial gainful activity.

Technical Note: Certain work at qualified locations for physically and mentally impaired persons ("sheltered employment") doesn't establish a person's ability to engage in substantial gainful activity. Sheltered employment pays below commercial employment wages and is usually accepted when someone can't otherwise get a job. It usually takes place at sheltered workshops, hospitals, homebound programs, and Department of Veterans Affairs (VA) sponsored homes.

The following are examples from IRS Publication 524 illustrating some of the tests for substantial gainful activity:

Example(s): Trisha, a sales clerk, retired on disability. She is 53 years old and now works as a full-time baby-sitter for the minimum wage. Even though Trisha is doing different work, she is able to perform the duties of her new job in a full-time competitive work situation for minimum wage. She cannot take the credit because she is able to engage in substantial gainful activity.

Example(s): Joan, who retired on disability from employment as a bookkeeper, lives with her sister, who manages several motel units. Joan assists her sister for one or two hours a day by performing duties such as washing dishes, answering phones, registering guests, and bookkeeping. Joan can select the time of day when she feels most fit to perform the tasks undertaken. This kind of work, performed off and on during the day at Joan's convenience, is not activity of a substantial and gainful nature even if she is paid for it. The performance of these duties does not, of itself, show that Joan is able to engage in substantial gainful activity.

Physician's statement: If you're under age 65, you need to obtain a statement from your physician certifying that you were permanently and totally disabled on the date you retired. You do not need to submit this statement with your federal income tax return, but you need to keep it for your records. The instructions for both Schedule R (Form 1040) and Schedule 3 (Form 1040A) include a statement that your physician can complete and that you can keep for your records. Note that if you file a joint return and indicate that both you and your spouse are permanently and totally disabled, then you must obtain separate physician's statements for both you and your spouse.

Tip: If you're a veteran, and the VA certifies that you are permanently and totally disabled, you can substitute VA Form 21-0172, Certification of Permanent and Total Disability, for the physician's statement that you are required to retain. Your local VA regional office can supply this form, and you must get it signed by a person authorized by the VA.

To qualify for the tax credit if you are under age 65, you must not only be permanently and totally disabled, but you must also be receiving taxable disability income. This disability income:

  • Must be paid under your employer's health, accident, or pension plan, and
  • Must be wages, or payment in lieu of wages, for the period you have missed work due to your permanent and total disability

The following payments don't qualify as disability income:

  • Payments from a plan that doesn't provide for disability retirement
  • A lump-sum payment for vacation time unused at the time you retire on disability
  • Payments you receive after you have reached your employer's mandatory retirement age

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What Are the Income Limits for Claiming the Credit?

In order to qualify for the tax credit as either elderly or disabled, your income must fall within two separate limits: one for adjusted gross income (AGI) and one for nontaxable Social Security or other nontaxable pensions. If your AGI and nontaxable pensions both fall below the established limits, then you may be eligible for the credit.

The following table gives the income limits:

If you are a qualified individual, you can claim a credit only if:

Your filing status is

AND

Your AGI is less than

Your total nontaxable Social Security and other nontaxable pensions are less than

Single, head of household, or qualifying widow(er) with dependent child

 

$17,500

$5,000

Married filing jointly and both spouses are qualified individuals

 

$25,000

$7,500

Married filing jointly and only one spouse is a qualified individual

 

$20,000

$5,000

Married filing separately and you didn't live with your spouse at any time during the year

 

$12,500

$3,750

How Do You Calculate the Credit?

You calculate your credit in Part III of either Schedule R (if you file Form 1040) or Schedule 3 (if you file Form 1040A).

Determining the amount of your credit involves four steps:

  • Figure out your initial amount (see below)
  • Total any nontaxable Social Security and certain other nontaxable pensions and benefits you received
  • Determine your excess AGI
  • Compute the amount of your credit

Figuring Out Your Initial Amount

The following table, adapted from Table 2 of IRS Publication 524, sets forth the initial amount for credit claimants of different statuses:

Table 2. Initial Amount Limits

If your filing status is:

 

Single, head of household, or qualifying widow(er) with dependent child and

Enter on line 10 of Schedule R:

You are 65 or older

$5,000

You are under 65 and retired on permanent and total disability

$5,000

Married filing jointly and

Enter on line 10 of Schedule R:

Both of you are 65 or older

$7,500

Both of you are under 65 and one of you retired on permanent and total disability

$5,000

Both of you are under 65 and both of you retired on permanent and total disability

$7,500

One of you is 65 or older, and the other is under 65 and retired on permanent and total disability

$7,500

One of you is 65 or older, and the other is under 65 and not retired on permanent and total disability

$5,000

Married filing separately and did not live with your spouse at any time during the year and

Enter on line 10 of Schedule R:

You are 65 or older

$3,750

You are under 65 and retired on permanent and total disability

$3,750

Caution: If you are a qualified taxpayer under age 65, the initial amount you enter on line 10 of Schedule R must be adjusted if it is greater than your taxable disability income. Thus, 1. If your filing status is single, head of household, or qualifying widow(er) with dependent child, your initial amount limit is $5,000 or your taxable disability income, whichever is less

  1. If your filing status is married filing jointly and your spouse is a qualified individual under age 65, your combined initial amount limit is $7,500 or your combined taxable disability income, whichever is less
  2. If your filing status is married filing jointly and your spouse is under 65 but is not a qualified individual, your initial amount limit is $5,000 or your taxable disability income, whichever is less
  3. If your filing status is married filing jointly and your spouse is age 65 or older, your initial amount limit is $5,000 plus your taxable disability income, or $7,500, whichever is less
  4. If your filing status is married filing separately, your initial amount limit is $3,750 or your taxable disability income, whichever is less

Totaling Nontaxable Social Security and Other Nontaxable Pensions and Benefits

You are then required to lower your initial amount by the total of all nontaxable Social Security and certain other nontaxable pensions and benefits you received during the year. If you're married and filing a joint return, you must enter the combined amount of these payments made to both you and your spouse.

The following is a list of nontaxable payments you must include:

  • Nontaxable Social Security payments: This sum is the nontaxable part of the amount shown in box 5 of Form SSA-1099. Don't include any lump-sum surviving spouse's death benefit payment or a surviving child's insurance benefit payments you may receive as a guardian.
  • Social Security equivalent part of tier 1 nontaxable railroad retirement pension payments: This sum is the nontaxable part of the amount shown in box 5 of Form RRB-1099.
  • Nontaxable pension or annuity payments, or disability benefits paid under a VA administered law: Don't include amounts constituting a pension, annuity, or allowance for personal injuries or sickness resulting from active service, or as a disability annuity under Section 808 of the Foreign Service Act of 1980.
  • Pension and annuity payments, or disability benefits excluded from income by a federal law other than the Internal Revenue

Code: Don't include amounts that constitute a return of your cost of a pension or annuity.

Tip: The instructions for Forms 1040 and 1040A include worksheets for determining whether any part of your Social Security benefits or equivalent railroad retirement benefits is taxable.

Caution: Make sure to include all nontaxable amounts you receive. The IRS verifies these amounts through information provided by other government agencies.

Determining Excess Adjusted Gross Income

You must next reduce your initial amount by a second amount: your excess AGI. There are two steps. First, subtract one of the following amounts from your AGI:

  • $7,500 if you are single, a head of household, or a qualifying widow(er) with a dependent child
  • $10,000 if you are married and filing jointly, or
  • $5,000 if you are married and filing separately, and you and your spouse haven't lived in the same household at all during the tax year Second, divide the remainder by two. The result is your excess AGI.

Computing the Amount of Your Credit

  • Confirm that you can take the credit: Before calculating the credit amount, you must confirm that you can take it. You do this by comparing the total of the figures from the previous two steps (nontaxable pensions and benefits plus excess AGI) with your (possibly adjusted) initial amount. If the total is less than this initial amount, you can take the credit. If it equals or exceeds this amount, then you can't.
  • The calculation: If you can take the credit, then take the total from the previous two steps and subtract it from your initial amount. You then calculate your credit by multiplying this result by 15 percent. Assuming you aren't subject to any limits discussed below, this is the amount of the credit.

Limits on the Tax Credit for the Elderly or the Disabled

The tax credit for the elderly or the disabled is limited to total tax (regular tax plus alternative minimum tax) reduced by any foreign tax credit allowed and any child and dependent care credit claimed. For more information, see IRS Publication 524.

 

 

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of  The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

 

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