Disability tax benefits

A person has a permanent and total disability if both of the following apply:

• They can’t engage in any substantial gainful activity because of a physical or mental condition; and
• A doctor determines their condition has lasted continuously for at least a year or will last continuously for at least a year or can lead to death.

The IRS further defines a permanent disability as one that prevents you from engaging in steady, consistent employment. It does not include activities that relate to ordinary personal and household maintenance. If you can still take care of your house and daily life, that doesn’t mean you can gain employment and the IRS would take this into account.

However, the level of household activity is a factor the IRS may consider in deciding whether you have a permanent and total disability.

Claiming the credit also requires you to obtain a statement from your physician certifying that you are permanently and totally disabled.

What are disability tax rules?

Broadly speaking, disability tax rules are meant to minimize the tax burden of disabled people.

Some disability payments are subject to income tax, while others are not. A few examples include:

• Social Security disability: Social Security disability benefits may or may not be taxable depending on how much other income you (and your spouse, if you're married) may have. In general, though, if Social Security disability is your only source of income, your benefits aren't taxable.
• Employer-paid disability benefits: If you get disability income from an employer while you aren’t able to work, that money is usually taxable just like regular wages.
• Disability insurance payments: If you have benefits from a disability insurance policy, your tax liability depends on who paid the premiums for the policy. If your employer paid the premiums, then the benefits are taxable. If you paid the premiums using after-tax money, your benefits are not taxable.

IRS Publication 915 has further details on figuring out whether your benefits are taxable.

Income limits for disability tax credits

Your Social Security disability benefits may be taxable if the total of one-half of your benefits, plus all your other income, including tax-exempt interest, is greater than the base amount for your filing status, according to the IRS.

The base amount for your filing status is:

• $25,000 if you're single, head of household, or qualifying surviving spouse,
• $25,000 if you're married filing separately and lived apart from your spouse for the entire year,
• $32,000 if you're married filing jointly, and
• $0 if you're married filing separately and lived with your spouse at any time during the tax year.

If you're married and file a joint return, you and your spouse must combine your incomes and Social Security benefits when figuring out the taxable portion of your benefits. Even if your spouse didn't receive any benefits, you must add your spouse's income to yours when figuring on a joint return if any of your benefits are taxable.

Claiming disability on your tax return

As mentioned above, Social Security benefits include monthly retirement, survivor, and disability benefits. They don't include supplemental security income (SSI) payments, which aren't taxable.

The net amount of Social Security benefits that you receive from the Social Security Administration is reported in Box 5 of Form SSA-1099, Social Security Benefit Statement, and you report that amount on line 6a of Form 1040, or Form 1040-SR, U.S. Tax Return for Seniors.

The taxable portion of the benefits that's included in your income and used to calculate your income tax liability depends on the total amount of your income and benefits for the taxable year. You report the taxable portion of your Social Security benefits on line 6b of Form 1040 or Form 1040-SR.

What if my child is disabled?

As the parent or legal guardian of a child with a disability, you may qualify for some of the following tax deductions and credits.

You may be able to claim your child as a dependent, regardless of age, if they are permanently and totally disabled. Again, this means that the child cannot engage in any substantial gainful activity because of a physical or mental condition. A doctor must determine that the condition has lasted, or is expected to last, continuously for at least a year or can lead to death. Always work with your medical team and a Tax Pro on what you’d need for your specific situation.

Earned Income Tax Credit (EITC) and disability

You may also qualify for the Earned Income Tax Credit (EITC), depending on certain conditions. If you have no children, the income limit is $17,640 for single filers and $24,210 for married couples filing jointly. The EITC is worth up to $600 if you have no children.

You can qualify for the EITC if you have a child or adult dependents with disabilities. The income limits increase for each qualifying dependent and the credit is worth significantly more, starting at $3,995 for one dependent and increasing to $7,430 if you have three or more dependents. Speak with your Tax Pro about how this may apply to you and your family.

Does sheltered employment affect eligibility?

The IRS does not consider sheltered employment “substantial gainful activity.”

Sheltered employment is when you or your child with a physical or mental disability works for minimal pay under a special program.

If people with physical or mental disabilities work for minimal pay, it must be done at a qualified location. Qualified locations include:

• Sheltered workshops,
• Hospitals and similar institutions,
• Homebound programs, and
• Department of Veterans Affairs (VA) sponsored homes.

Questions about what to do if you think you or someone in your family may be eligible for disability tax breaks? Contact a Jackson Hewitt Tax Pro near you to discuss how you may benefit from various disability tax credits and deductions.

About the Author

Jo Willetts, Director of Tax Resources at Jackson Hewitt, has more than 35 years of experience in the tax industry. As an Enrolled Agent, Jo has attained the highest level of certification for a tax professional. She began her career at Jackson Hewitt as a Tax Pro, working her way up to General Manager of a franchise store. In her current role, Jo provides expert knowledge company-wide to ensure that tax information distributed through all Jackson Hewitt channels is current and accurate.

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