Elderly individuals and people with certain physical or mental disabilities that limit or prevent them from working are likely eligible for tax credits, including an increased standard deduction, credits for child and dependent care, and the earned income tax credit (EITC). These credits could significantly decrease ― or even eliminate ― the amount owed in taxes.
Qualifying for Disability Tax Credits
U.S. citizens and residents who are at least 65 years old — including those who turn 65 at any time during the tax year — are eligible to receive a tax credit. Additionally, those individuals who are under the age of 65 can still receive a tax credit if they have retired due to permanent and total disability. Individuals are also eligible for the tax credit if they have received taxable disability income during the tax year but did not reach the age for mandatory retirement, which is at the discretion of the employer and will vary with each different company (if applicable).
What Constitutes a “Permanent Disability”
Individuals whose illnesses or ailments prevent them from maintaining consistent gainful employment may qualify for a permanent disability credit. This doesn’t include regular non-work-related activities or household upkeep, as these activities don’t inherently imply that the individual is capable of gainful employment.
That said, the IRS does take into account the level of household activity when determining whether an individual has a permanent and total disability. Additionally, individuals attempting to claim the permanent disability credit must furnish a statement from their physician verifying their permanent and total disability.
Taxable Disability Income
In order to meet the requirements for this tax credit, a person’s former employer or employers must pay disability income under an accident, health, or pension plan. This income is taxable in the same way as wages collected while absent from work. However, it doesn’t include payments received from a 401(k) or accrued paid time off.
There are certain thresholds that could preclude an individual from claiming the disability income credit. People who file as single, head of household, or qualifying widower with a dependent child must have an adjusted income that is less than $17,500 with non-taxable social security and pension income of less than $5,000. Individuals filing joint returns must have adjusted income that is less than $20,000 with non-taxable social security and pension incomes of less than $5,000.
Disabled Children and the Earned Income Tax Credit
In order for children to qualify for the EITC, they must have a valid Social Security number that was issued prior to the tax return’s due date. Additionally, they must meet several IRS tests, including those for age, relationship, residency, and joint return. The child must be the son, daughter, adoptee, or sibling of the applicant, or the offspring of one or more of these relatives.
The age requirement does not impose a strict age limit, and the child could even be younger than the applicant if he or she is permanently and totally disabled. However, the child must meet two requirements in order to be deemed permanently and totally disabled:
- The child is unable to participate in significant gainful activity due to their physical or mental condition
- A licensed physician determines that this physical or mental condition has lasted or will last for at least one year or could potentially result in death
Proving an EITC claim for a permanently and totally disabled child requires a letter from the child’s licensed physician or other licensed healthcare provider, or from a social service program or agency substantiating the claim. Additionally, children working for minimal pay via special programs designed to help disabled persons are not considered to be engaged in “substantial gainful activity” as long as the position is offered by one of the following four qualifying locations:
- Sheltered workshops
- Hospitals and similar institutions
- Homebound programs
- Department of Veterans Affairs (VA) sponsored homes
Contact S.H. Block Tax Services to Learn More About Qualifying Disabilities
If you or your child or a friend or family member is permanently and totally disabled and you want to learn more about the Earned Income Tax Credit, the tax professionals at S.H. Block Tax Services are here to help. Please contact us today at (410) 793-1231 or complete this brief form and we will schedule a free consultation to review your options.
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