Tax Considerations of Disabled Taxpayers

If you happen to be disabled there are numerous benefits available from the Federal Government and Internal Revenue Service (IRS) that can be of significant help in reducing or even eliminating your federal income tax. Some income you receive won’t need to be reported, and there are several tax credits that you might be eligible to receive.  The following is a brief summary: 

Gross Income: Certain disability income payments should be excluded from your gross income and are not taxable.  For example, Veterans Administration disability benefits and Supplemental Security Income (SSI) may be excluded from your gross income. IRS Pub 525 is a good source of information, together with IRS Pub 907.  

Disability Income: For example, benefits from an employer’s disability plan are considered earned income until you attain minimum retirement age, much the same as “sick pay” is taxable. However, disability income payments received from an insurance policy that you have paid for yourself are not reportable income for tax purposes. 

Long-Term Care Insurance Contracts are generally treated the same as other health insurance contracts for taxation purposes.  That is, benefits you receive from a plan that you have paid for yourself would not need to be reported as income.  However, if an employer paid the premiums, benefits may be reportable as income. (The employer will provide you with a statement of your taxable income.) 

Workers Compensation payments are generally not taxable if they are paid as a result of work-related injury or sickness. 

Government Disability Benefits for the most part are exempt from income taxes. If the only income you received was your social security (or equivalent railroad retirement) benefits, generally those benefits are not taxable.  However, if you also received other income during the year, part of your benefits may be subject to tax if half of these benefits plus all of the other income are more than:

• $32,000 if you are married filing jointly
• $25,000 if you are single, head of household or married filing separately and lived apart from your spouse
• $0 if you are married filing separately but lived with your spouse any time during the year 

Other Payments:   Benefit payments from a public welfare fund such as payments due to blindness are not taxable. Similarly, compensatory damages for physical injury or sickness, and disability benefits under an auto policy for loss of income or loss of earning capacity as a result of injuries are not taxable income. Compensation for permanent loss or loss of use of part or function of your body or permanent disfigurement is not taxed. 

Standard Deduction: Taxpayers who are legally blind receive an increased standard deduction in case they do not have itemized deductions. Generally, you add $1,100 to the regular standard deduction for anyone who is blind – or $1,400 if you are single or file as head of household. This directly reduces your “adjusted gross income.” 

Earned Income Tax Credit (EITC):  This is a tax credit for certain people who work and have low earned income. Many working individuals with a disability that have no qualifying children, who are at least 25 years of age but under 65 years of age, qualify for EITC. The EITC reduces the amount of tax you owe and may also give you a refund.  You may qualify for this credit if you have a qualifying child who is permanently and totally disabled, regardless of age, as long as you meet the other requirements.   

Credit for the Elederly or Disabled:  You may be able to claim this credit if you are 65 or older, or if under 65 you are retired on permanent and total disability.  The credit can actually reduce your taxable income. See IRS Pub 524  for details. 

There are a number of other possible credits that you may be eligible for. The Internal Revenue service has produced a two-page flyer that lists a series of informational publications dealing with living and working with disabilities.  Find it at IRS Pub 3966. Or, if you would like the assistance of a professional who has years of experience in this area, contact your local PRO-TAX office. 

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