Tax Tips for the Legally Disabled
Several tax breaks are available for people living with disabilities. These tax breaks aren't always obvious, though. You have to know where to look for them.
Key Takeaways
- Disability income from an employer and benefits from a disability insurance policy your employer paid for are typically taxable. Benefits from an insurance policy that you paid for with after tax money are typically not taxable.
- If Social Security disability is your only source of income, your benefits usually aren't taxable. However, if you (and your spouse, if you’re married) earn other income, your benefits may be taxable, depending on your income level.
- If your disability income is taxable, you may qualify for the federal Credit for the Elderly and Disabled. To qualify, you must be permanently and totally disabled and meet certain income requirements.
- You may be eligible for the Child and Dependent Care Credit if you (or your spouse if filing a joint return) paid someone to take care of a qualifying person with a disability, including yourself or your spouse, so that you or your spouse could work.
Easing the tax burden
The federal tax code includes a number of provisions that can ease the tax burden on people living with a disability. Some disability payments and benefits are free of income tax, while deductions and credits can reduce the taxes you do owe. These tax breaks aren't always obvious, though. You have to know where to look for them.
Payments and benefits
Some disability payments are subject to income tax, while others are not. Here are some common situations:
- Employer-paid disability benefits: If you receive disability income from an employer while you are unable to work, that money is usually taxable just like regular wages.
- Disability insurance payments: If you receive 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.
- 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. Internal Revenue Service Publication 915 provides further details on determining whether your benefits are taxable.
Disability tax credit
If you are permanently and totally disabled and have taxable disability income, you may qualify for the federal Tax Credit for the Elderly and Disabled. This credit is available only if a doctor has certified that your disability prevents you from working and that your condition is expected to last more than a year or result in your death. The size of your credit depends on how much taxable disability income you had as well as how much you received in nontaxable disability benefits. See IRS Publication 524 for more details.
TurboTax Tip:
If you make home improvements to accommodate a disability (and not for aesthetic reasons), you might be able to claim those costs as a medical expense deduction. See IRS Publication 502 provides for details.
Home modifications
If you make certain home improvements to accommodate a disability, you may be able to claim those costs as a medical expense deduction. This includes such things as adding a wheelchair ramp, chair lift or grab bars; modifying hardware, electrical fixtures or railings; or widening doorways or aisles. The improvements must be made solely to accommodate a disability and not for aesthetic reasons. If the improvements increase the value of your home, you can deduct only the portion of the cost that exceeds the increase in value. IRS Publication 502 provides more details and examples.
Care expenses
If you are married, and you and your spouse paid someone to take care of you because your disability made you unable to care for yourself, then you may be eligible for the Child and Dependent Care Credit. The exact amount of the credit depends on how much you spent on care and how much earned income you and your spouse had.
In 2024 and 2025, for example, the maximum credit ranges from $600 to $1,050, depending on income, or $1,200 to $2,100 if you also paid for care for two or more qualifying people. See IRS Publication 503 for more details.
For 2021, the American Rescue Plan brings significant changes to the amount and way that the child and dependent care tax credit can be claimed. The plan increases the amount of expense eligible for the credit, relaxes the credit reduction due to income levels, and also makes it fully refundable. This means that, unlike other years, you can still get the credit even if you don’t owe taxes.
For tax year 2021:
- The amount of qualifying expenses increases from $3,000 to $8,000 for one qualifying person and from $6,000 to $16,000 for two or more qualifying individuals.
- The percentage of qualifying expenses eligible for the credit increases from 35% to 50%
- The beginning of the reduction of the credit is increased from $15,000 to $125,000 of adjusted gross income (AGI).
Also for tax year 2021, the maximum amount that can be contributed to a dependent care flexible spending account and the amount of tax-free employer-provided dependent care benefits has been temporarily increased from $5,000 to $10,500.
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