Who Qualifies for the Credit?

In order to qualify for the tax credit for the elderly or disabled, you must be a U.S. citizen or resident, you must be either age 65 or older or totally and permanently disabled, and your income must be below a certain limit based on your filing status for tax purposes.

Age 65 or Older

For tax purposes, you are considered to be age 65 on the day before your 65th birthday.  So if you reach age 65 on January 1st, you are considered age 65 for the preceding tax year if you report on a calendar-year basis.

Disabled

If you are under age 65, you can qualify for this credit if you retired on total and permanent disability before reaching the minimum retirement age set by your employer.  Also, in order to claim the credit, you must have disability income.  Even if you did not formally retire, you are considered to be retired if you stopped working because of your disability.

Being totally and permanently disabled means that you are unable to engage in any substantial gainful activity because of your physical or mental condition.  You must have a physician’s certification that your condition has lasted, or can be expected to last 12 continuous months or more, or that the condition can lead to death.  Being engaged in a substantial gainful activity means performing significant duties over a reasonable period of time while working for pay or profit, or doing work that is normally done for pay.  Working full-time or part-time in a competitive environment for at least the minimum wage would be proof of your ability to engage in a substantial gainful activity.

Substantial gainful activity does not include taking care of yourself at home, unpaid work you perform as a hobby or in social programs, therapy, training or education.  It must be work you perform for pay.  The fact that you have not worked for a period of time does not necessarily demonstrate that you cannot engage in substantial gainful activity.  And if you retire on disability from one job and then take another job, you may not be considered permanently and totally disabled for purposes of this credit.  The amount of income you earn is not necessarily a factor, but the work you perform must be productive work and not make-work in order for it to be considered a substantial activity.  Working full-time as a volunteer may show that you are not disabled if the work you perform would be for pay under other circumstances.  But working a few hours a day, at your convenience and when you feel capable, will not disqualify you from being considered disabled for purposes of this credit.

Certain qualified locations may offer what is termed “sheltered employment” to physically or mentally disabled persons.  These could include sheltered workshops, hospitals, homebound programs, and homes sponsored by the Department of Veterans Affairs (VA).  Working in sheltered employment may not provide the same level of income as in other types of employment, but it does not necessarily mean you are not capable of engaging in substantial gainful activity.

You will need a physician’s statement certifying that you were totally and permanently disabled on the date you retired.  There is a standard format in the Internal Revenue Service (IRS) instructions for Schedule R (Form 1040) and Schedule 3 of Form 1040A that you can use.  These instructions are available for downloading from the IRS website.  If you are a veteran, you can use VA Form 21-0172, Certification of Permanent and Total Disability, from the Department of Veterans Affairs.

If you are under age 65 and disabled, you can claim the Credit for the Elderly or the Disabled only if you have disability income.  This income must be paid under your employer’s accident or health plan or pension plan, and must be included in your taxable income.  Payments that are made from a plan that does not provide for disability retirement do not qualify as disability income.  And for purposes of this credit, disability income does not include amounts paid when you reach mandatory retirement age.

Income Limits

There are annual limits on the amount of income you can have and still be able to claim the Credit for the Elderly or the Disabled.  You cannot claim the credit if your income is over these amounts.  There are different limits on the level of income that qualifies for the credit, based on filing status.  For purposes of this credit, four different filing statuses are defined:

• Single, head of household, or qualifying widow(er) with dependent child
• Married filing jointly and both spouses qualify
• Married filing jointly and one spouse qualified
• Married filing separately and you did not live with your spouse at any time during the year

There are two different limits that apply for each of the above filing statuses.  One limit is your adjusted gross income, and the other is the total of your nontaxable social security and other nontaxable pensions.  You cannot claim the Credit for the Elderly or the Disables if either your adjusted gross income or your total social security and nontaxable pensions is over the corresponding limit.

These limits are indicated in the instructions and publications issued by the Internal Revenue Service each year.  Tables of these limits on income can be found in the instructions for Schedule R (Form 1040) and Schedule 3 of Form 1040A, or in Publication 524, Credit for the Elderly or the Disabled. 

Citizen or Resident

Generally a nonresident alien does not qualify for this credit.  But if you are a nonresident alien who is married to a U.S. citizen or resident at the end of the year, and you and your spouse decide to treat you as a resident for tax purposes, you will be subject to U.S. income tax on your worldwide income, but you will also be eligible for this credit.  You should make this choice taking into account all your income tax considerations.

Filing Status

If you are married at the end of the year, you and your spouse must generally file a joint return in order to claim the credit for the elderly or disabled.  But if you and your spouse did not live in the same household at any time during the year, you can file either separately or jointly and still claim the credit.

You can file as head of household and claim the credit if you meet certain tests.  If you were married, and your spouse lived with you during the first six months of the year, you can still qualify to take the credit if your spouse did not live in your home any time during the last six months of the year.  You must have paid more than half the cost of keeping up your home for the year, and your home must have been the main home for more than half the year for your child, stepchild, or adopted child, or it must have been the main home for the entire year for your foster child.

Finally, you must have been able to claim an exemption for the child, or the only reason you could not claim an exemption was because you allowed your spouse to claim the exemption as the non-custodial parent (for example, by signing Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents), you signed an agreement that went into effect before 1984 stating that your non-custodial spouse can claim the exemption without any conditions, such as payment of support, or your spouse as the non-custodial parent provided at least $600 of the child’s support and can claim the exemption based on a pre-1985 agreement.

How To Determine the Credit

You can let the IRS figure the credit for you.  If you choose to calculate it yourself, you should first fill out the front part of Schedule R if you are filing Form 1040, or Schedule 3 if you are filing Form 1040A.  (You cannot file Form 1040EZ if you want to claim this credit.)  Next you fill out Part III of Schedule R or Schedule 3 to calculate your credit.

Basically, your credit is 15% of the amount by which your “initial amount” (a fixed amount based on your filing status and situation) exceeds the total of your nontaxable benefits plus half the amount by which your adjusted gross income exceeds a certain base amount.

There are four steps involved in calculating the credit:

1. Determine your initial amount.
2. Total any nontaxable social security and certain other nontaxable pensions and benefits you received.
3. Determine your excess adjusted gross income.
4. Determine your credit.

Step 1 – Initial Amount

The initial amount is indicated in a table in Part III of Schedule R (Form 1040) or Schedule 3 (Form 1040A), and depends on your filing status, whether you are claiming the credit for being age 65 or older or because you are under age 65 and disabled, and if you are married, whether you are claiming the credit for one or both spouses.

If you are under age 65, your initial amount cannot be more than your taxable disability income.  In this case, the amount you use for step 1 would be the lesser of your taxable disability income or the fixed amount indicated for your filing status and situation.

Step 2 – Nontaxable Pensions and Benefits

In this step, you have to determine the total amount of your nontaxable social security and other benefits.  There are worksheets in the instructions for Form 1040 and 1040A to determine any taxable portion of your social security or railroad retirement benefits.  The difference would be the nontaxable portion to be included here.  Or all your benefits may be nontaxable.

In addition to nontaxable social security and railroad retirement benefits, you must include any nontaxable pension or annuity benefits or disability payments you receive from the Department of Veterans Affairs.  But you do not have to include pensions, annuities, or similar allowances for personal injuries or sickness resulting from active service in the armed forces of any country, the National Oceanic and Atmospheric Administration, the Public Health Service, or the Foreign Service.  You would also have to include any pension, annuity, or disability benefits that you receive and that are exempt from income tax under any federal law other than the Internal Revenue Code.

If you have an investment in a pension or annuity contract, you do not have to include any portion of the benefits that represent a return of your cost.

Step 3 – Excess Adjusted Gross Income

In this step you are reducing your initial amount from Step 1 by your excess adjusted gross income.  This excess is the difference between your adjusted gross income as reported on your tax return and a fixed dollar amount based on your filing status.  These amounts are shown on the tax form itself, alongside the line for calculating this excess.  Once you determine the excess, you divide that amount by 2.

Step 4 – Determine Your Credit

First you must add the amounts determined in steps 2 and 3.  If this total is more than the initial amount from step 1, you cannot claim a credit.  If the total from steps 2 and 3 is less than the amount from step 1, you can claim a credit.

If you qualify, the credit is 15% of the total of steps 2 and 3.  The amount of your Credit for the Elderly or the Disabled cannot exceed your total tax for the year.