Tax Deductions and Credits for People with Disabilities

From EITC to certain expenses, tax credits and deductions can save people thousands of dollars; tax treatment of SSDI and other disability benefits are common areas of confusion.

Many of the millions of people with disabilities may be paying more in taxes than necessary, according to Allsup, a nationwide provider of Social Security Disability Insurance (SSDI) representation and Medicare plan selection services.

"People with disabilities often aren't aware of tax credits and deductions that could help them save money," said Paul Gada, a tax attorney and personal financial planning director for the Allsup Disability Life Planning Center. "In fact, certain credits are refundable, meaning you can get money back even if you owe no taxes."

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Essential Tax Management Steps

Know How SSDI and Other Benefits are Taxed

• Monthly SSDI benefits: Up to 50 percent of SSDI benefits are taxable each year. The amount is determined by adding one-half of your SSDI benefits to all of your other income sources. For 2010, taxes are owed on any amount above $32,000 for couples filing jointly and $25,000 for individuals. "The average monthly SSDI benefit for 2010 was $1,064, or $12,768 for the year. As a result, many people relying on SSDI will not owe taxes," Gada said. "However, they still should consider filing a tax return if credits could mean a refund."
• Lump-sum SSDI benefits: Because it can take years to receive disability benefits, most people initially receive a lump-sum amount, which includes back payments. Paying taxes on this amount in one year is a mistake and could be financially costly, pushing you into a higher tax bracket. The IRS allows taxes on this lump-sum payment to be spread over previous tax years using the current-year tax return. This means recipients do not have to go through the time or expense of filing amended returns. However, the calculations are complex, and Gada advises seeking tax assistance. Allsup provides a list of free tax help resources for people with disabilities on its website.
• Other benefit sources: People with disabilities may rely on additional benefits for income. Generally, workers' compensation benefits and compensatory damages for injuries aren't taxed. Additionally, long-term disability (LTD) insurance benefits are not included in taxable income if you paid the premiums with after-tax dollars. However, they are taxable and must be included in your income if you paid LTD premiums with pre-tax dollars as part of a cafeteria plan, for example, or your employer paid your premiums.

Claim Tax Credits for Which You are Eligible

Tax credits offer one of the most effective ways to lower taxes because they provide a dollar-for-dollar tax reduction or refund. Some important tax credits people with disabilities are commonly eligible for include:

• Earned income tax credit (up to $5,666): The EITC is a refundable credit, meaning that when it is applied any amount higher than a person's tax bill can result in a tax refund. To be eligible, you or your spouse had to be employed for part of 2010, earned below $13,460 to $48,362 (depending upon filing status and the number of children claimed) and had investment income of no more than $3,100. "Many people with disabilities who don't file a tax return because their income is so low could be losing out on thousands of dollars from the EITC," said Gada.
• Credit for the disabled (up to $7,500): You are eligible for this credit if you receive taxable disability income from a former employer's accident, health or pension plan and meet income requirements. Your 2010 adjusted gross income must be under $17,500 for single filers, under $20,000 for joint filers with one spouse eligible for the credit or under $25,000 for joint filers with both spouses eligible.
• Dependent care credit: If you pay someone to care for a dependent or spouse with physical or mental impairments, you may be able to take a credit of up to 35 percent of day care costs while you are working or looking for work.

Use Deductions to Reduce Taxes

• Increased standard tax deduction: A higher standard tax deduction may be available to you if you are blind or visually impaired.
• Medical deductions: If you itemize, you can deduct medical costs if they exceed 7.5 percent of your adjusted gross income. Deductible expenses include medical and dental costs, travel expenses for treatment, long-term care insurance, medical insurance premiums and costs for certain equipment for those with visual, hearing and physical disabilities. If you, your spouse or your child has a chronic illness, costs for attending conferences related to that illness also may be deducted as a medical expense.
• Deduct the costs of seeking SSDI benefits: If you hired a representative such as Allsup to help you get your SSDI benefits and you itemize, you can deduct the fee that you paid your representative when figuring out the tax-ability of a lump-sum SSDI payment you received.

The information provided is not intended as a substitute for legal or other professional services. Legal or other expert assistance should be sought before making any decision that may affect your situation.

Insights, Analysis, and Developments

Attribution/Source(s): This quality-reviewed publication was selected for publishing by the editors of Disabled World (DW) due to its relevance to the disability community. Originally authored by Allsup and published on 2011/02/18, this content may have been edited for style, clarity, or brevity.