Guide to Tax Breaks for People With Disabilities
Being disabled makes you eligible for a number of tax breaks. However, it is not always “clear-cut” how to take advantage of them. To make the most of tax breaks for people with disabilities, you will want to consult one of the best tax relief companies with no retainer fees. That way, you will be able to maximize the tax relief options that pertain to your particular situation. In this article, we are going to explain how the IRS looks at people with disabilities and provide you with an explanation of some of the most popular tax relief options.
What is considered a disability? (for tax purposes)
The word “disability” is quite vague, at least when it comes to taxes. The important thing to note is not the disability itself but whether it prevents or limits your employability. With this in mind, the IRS will consider you disabled if any of the following conditions are met:
- You have a physical disability (e.g. blindness or deafness)
- You have a mental disability
- You have a physical or mental impairment (sight, hearing, etc.)
Again, your disability needs to prevent or limit you from doing “normal” work for you to be eligible for any of the associated tax breaks. Furthermore, the exact number of tax breaks available to you will differ on a case-by-case basis. For example, some disability payments are completely free of income tax, while others might be taxed. Being disabled also means that you may have access to most of the popular tax deductions that you can combine with disabled-specific tax breaks. Overall, the U.S. Tax Code is incredibly complex and complicated, and you might need professional assistance to maximize your tax return.
With that in mind, let’s take a look at some of the best options that might be available to you.
Tax breaks for people with disabilities
Here are the most common tax relief options for people with disabilities:
- Disability tax credit
- Work expenses
- Medical expenses
- Home modifications
- Care expenses
- ABLE Accounts
- Tax-free disability payments
There are also specific options for specific disabilities. For example, if you happen to be legally blind, you are entitled to a higher standard deduction. The exact amount is dependent on your filing status, your age (being 65 or older merits a higher deduction amount), and whether it is possible for someone else to claim an exemption for you. To be frank, it all gets rather complicated real fast. Aside from hiring a professional tax consultant, the best thing to do is to read all the IRS publications regarding these specific deductions. The best place to start would be the IRS publication 501, but you may need to extend your research if you want to get the complete picture.
All in all, there are literally hundreds of specific tax breaks for people with disabilities. It is, unfortunately, beyond the scope of this article to detail all of them. Instead, we will focus on the most popular (and most beneficial) tax breaks that are available to you.
Disability tax credit
If you happen to be totally disabled (permanently) and receiving taxable disability income, you may be able to qualify for the elderly and disabled tax credit. You will need to have a certification of your disability from your doctor, which will state that the disability prevents you from working. Furthermore, the condition needs to be expected to last more than a year.
The credit amount you get from the federal tax credit for the elderly and disabled varies depending on your taxable disability income, as well as your nontaxable disability benefits. Another thing that may influence the amount is borrowing money from IRA. Even so, the disability tax credit is most likely going to be quite significant and is one of the first options that you might want to explore.
Whenever a disability impairs your ability to work or be employed, you are entitled to deduct any work expenses that are related to your impairment. These expenses include any care that you require due to your disability and any disability-related services that you may require. For example, you may incur additional expenses if you are blind, as you may need to employ a reader to allow you to work in the first place.
It is important to note that these disabilities are separate from various tax reductions for businesses. It is entirely possible to combine disability-related tax breaks with other tax benefits that businesses are entitled to. What that means is that you are completely free to run your own business and not worry about your disability, removing any of the business-related tax relief options.
The way that impairment-related work expenses function is by not having them subjected to the standard 7.5% AGI (Adjusted Gross Income) limit for deducting medical expenses.
Speaking of medical expenses, you can still deduct them as a personal itemized deduction, but there are a few limitations. First, there’s the question of eligibility for these tax breaks for people with disabilities. There are only a few medical expenses that are eligible, such as health insurance premiums and out-of-pocket expenses that are not covered by your insurance. Second, this particular tax deduction is limited to the amount that exceeds your AGI. Currently, only the amount that exceeds 10% of your AGI is eligible. However, this used to be 7.5% prior to 2019, meaning that there is a high possibility it will change again in the following years.
Medical expense deductions for people with a disability are one of the most complex tax breaks there are. The reason for that is that figuring out what is a medical necessity and what isn’t can be quite difficult. This is also the reason why many of the popular IRS tax scams involve medical expenses. The best thing you can do to protect yourself from common IRS tax scams is to ensure that you are working with reputable tax professionals. Otherwise, you may end up paying much more than you get.
Another very popular tax deduction has to do with home modifications. People that have a disability usually need to modify their homes to accommodate their disability. Basically, any modification that is medically necessary will be eligible for a tax break. Examples include installing a wheelchair ramp or grab bars, modifying electrical fixtures, widening doorways, etc.
The “catch” is that these improvements need to be made solely because the disability demands them. The IRS scoffs at any improvements that look to be made for aesthetic reasons and may deny you the opportunity to deduct them. That being said, there is a lot of “wiggle room” when it comes to home modifications and tax deductions. For example, it is entirely possible to get a deduction for top rated home security systems under the right circumstances. Again, to figure out whether you are able to make an improvement and have it be tax-deductible, it is best to consult a tax professional.
Lastly, there is also the matter of these improvements increasing the value of your home. If that happens to be the case (as it usually is), you can only deduct the amount higher than the increase in the home’s value. For more information, you may want to take a look at IRS Publication 502. The publication includes many other examples, as well as numerous details that pertain to these particular tax deductions.
If you need to pay someone to take care of you, you can deduct the amount when you file your tax report. The way that you do that is by applying for the Child and Dependent Care Credit. To be eligible for this credit, you must be married and pay someone for your care. The exact credit amount you can get from these tax breaks for people with disabilities depends on how much you spent on the care itself and on how much you and your spouse earned throughout the year. Furthermore, there is a “cap” on these expenses. The maximum amount you can receive under this credit ranges from $600 to $1,050. This amount could be increased to $1,200-$2,100 if you paid for care for two or more people.
Additionally, due to several changes brought by the American Rescue Plan, the credit reduction due to income levels was reduced and was made fully refundable. What this means is that you can get the credit even if you do not owe any taxes whatsoever. Lastly, there’s a limitation to how much can be contributed to a dependent care flexible spending account. This limitation is usually $5,000 but has been temporarily increased for the tax year 2021 (the taxes you file in 2022) to $10,500.
One of the best tax breaks for people with disabilities is the fact that you can establish an ABLE account. This account, named for the Achieving a Better Life Experience, provides you with the ability to save money in advance. This money, of course, has to be used to pay for your expenses. The main benefit of ABLE accounts is the fact that you are not jeopardizing your eligibility for government help.
The rules involving ABLE accounts stipulate that you can only establish one account per individual or family. Furthermore, the account can receive a maximum of $14,000 in contributions each year. You don’t need to be the one making the contributions, either. However, you can still contribute to the account even after the initial $14,000. The only restrictions are that you (the disabled person) need to make the contribution on your own and that the contribution amount is equal to the lesser of the:
- Your compensation for the year
- The federal poverty line for a one-person household
ABLE accounts provide you with some of the best tax breaks there are. These tax breaks are so potent that many people have to handle tax identity theft due to scammers stealing their information. If you don’t already have an ABLE account, it might be in your best interest to get one.
Tax-free disability payments
Most disability payments are non-taxable. There are some exceptions, however, such as military disability pensions based on years of service. Basically, if the disability payment is based on the disability alone, it is non-taxable. Otherwise, it may be subject to taxation. Some of the most common tax-free disability payments include:
- Compensations for permanent loss/use of a part of your body
- Compensations for permanent disfigurement
- Benefit payments from a public welfare fund
- Compensatory damages
- Workers’ compensation for an occupational sickness or injury
Some of these situations can be “conditional”. For example, workers’ compensation is only non-taxable if paid under a workers’ compensation act, provided that the amount does not offset Social Security disability benefits. Another example is the fact that compensatory damages cannot be punitive. All in all, there are a lot of specific cases, and it is impossible to cover them all. The best option that you have, you’ve guessed it, is to get a certified tax professional to help you.
Tax breaks for people with disabilities explained
These are not the only tax breaks for people with disabilities that exist, but they are the most popular options. The U.S. tax code is incredibly complicated, after all, and it is practically impossible to present you with all the options for all use-case scenarios. The best thing you can do to maximize your tax return is to find a reputable tax relief company. Tax professionals will be able to assess your particular situation and provide you with the best options.
To find the best tax relief companies near you, all you need to do is refer to the Consumer Opinion Guide. You can also peruse our knowledge database and discover even more tips and tricks that you can use to maximize your tax return.