Schedule R: The Tax Credit for the Elderly or the Disabled

Find Out Whether You Qualify for the Tax Credit for the Elderly or the Disabled

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People who are 65 or older and those who have retired early due to disability can be eligible for a federal tax credit. The Credit for the Elderly or the Disabled reduces federal income taxes related to disability income, but several qualifying rules apply.

Who Qualifies for Schedule R?

Schedule R (Form 1040) can help you figure the Credit for the Elderly or the Disabled. To qualify, a taxpayer must be a U.S. citizen or resident alien who: 

  • Has reached age 65 before the last day of the tax year
  • Has retired on disability before the last day of the tax year and was permanently and totally disabled when they retired
  • Is under age 65 at the last day of the tax year but who retired on permanent and total disability, received taxable disability income, and has not yet reached mandatory retirement age as of January 1 of the new tax year

You're considered to be age 65 on the day before your 65th birthday, so you would be considered to be age 65 on December 31, 2020 if you were born on January 1, 1956.

The Disability Requirement 

Internal Revenue Code section 22, paragraph (e) (3) states that you must be permanently and totally disabled to the point where you can no longer perform any gainful activity. Your impairment must be "medically determinable," and it can be either mental or physical. It's expected to last continually for at least 12 months, or it's likely to result in your death.

You must be able to provide proof of your infirmity. A qualified physician must confirm your condition.

Retiring on Disability 

You don't necessarily have to formally retire. You can be considered retired on disability if you've been forced to stop working because of your disability.

Disability income must be paid under your employer's accident or health plan or pension plan, and it must be included in your income as wages or payments instead of wages for the time you are absent from the workforce because of permanent and total disability.

Any payment you receive from a plan that doesn't provide for disability retirement isn't disability income. For example, a lump-sum payment for accrued annual leave that you receive when you retire on disability is a salary payment and it isn't disability income. Disability income doesn't include amounts you receive after you reach a mandatory retirement age set by your employer when you would have had to retire even if you hadn't become disabled.

The IRS provides an interactive interview on its website to walk you through the steps of determining if you qualify. Just answer some questions, and it will give you an answer. The interview takes about five minutes.

Income Limits

In addition to the other qualifying factors, a taxpayer’s adjusted gross income (AGI) must be lesser than or equal to the following amounts as of the 2020 tax year. This is the tax return you'll file in 2021.

If your filing status is...

Your adjusted gross income must be less than or equal to...

Single

$17,500

Head of household

$17,500

Qualifying widow(er) with dependent child

$17,500

Married filing jointly and only one spouse qualifies

$20,000

Married filing jointly and both spouses qualify

$25,000

Married filing separately and you lived apart from your spouse for the entire year

$12,500

How to Calculate the Credit 

The tax credit is 15% of the initial amount, less the total of nontaxable Social Security and certain other nontaxable pensions, annuities, or disability benefits you've received. You must also add one-half of your adjusted gross income (AGI), less the AGI limitation amount. The equation would like this: 

15% x A - B + ½ C - D, where:

  • A = The initial amount
  • B = The nontaxable portion of your Social Security and certain other nontaxable pensions, annuities, or disability benefits
  • C = Your adjusted gross income
  • D = The adjusted gross income limitation amount

This formula results in a tentative tax credit. The tentative amount is then compared to the federal tax liability as calculated using the Credit Limit Worksheet found in the Instructions for Schedule R. The final tax credit is the smaller of the tentative amount or the tax liability limit amount.

The Initial Amount 

Your initial amount is the lesser of your taxable disability income or the following set amounts as of the 2020 tax year:

If your filing status is...

The initial amount is the smaller of taxable disability income or the following set amounts...

Single

$5,000

Head of household

$5,000

Qualifying widow(er) with dependent child

$5,000

Married filing jointly and only one spouse qualifies

$5,000

Married filing jointly and both spouses qualify

$7,500

Married filing separately and you lived apart from your spouse for the entire year

$3,750

Nontaxable Pension Benefits 

The following sources of income are included when measuring the nontaxable portion of pension benefits:

  • Nontaxable Social Security benefits
  • Nontaxable railroad retirement benefits treated as Social Security
  • Worker's compensation benefits (according to the instructions for line 13a of Schedule R, you should treat the workers' compensation benefits as Social Security benefits if your Social Security or railroad retirement benefits are reduced because of workers' compensation benefits)
  • Veteran's pensions
  • Any other pension, annuity, or disability benefit that is excluded from income

The following types of income are not included when measuring the nontaxable portion of pension benefits:

  • Military disability pensions
  • Amounts that are treated as a return of your cost basis in the pension or annuity
  • Disability annuity payable under Section 808 of the Foreign Service Act of 1980
  • Any pension, annuity, or similar allowance for personal injuries or sickness resulting from active service in the armed forces of any country, or in the National Oceanic and Atmospheric Administration or the Public Health Service

AGI Limitations

The following figures are used to calculate the credit.

If your tax filing status is...   Your adjusted gross income limitation amount is...
 Single, head of household, or qualifying widow(er)  $7,500
 Married filing jointly  $10,000
Married filing separately $5,000

How to Claim the Credit

Claiming the Credit for the Elderly or the Disabled requires filing two additional forms with your tax return. Schedule R shows your calculations as to how you arrived at the amount of your credit. You must then enter the total from this form on Schedule 3, and this is where it gets a bit tricky.

Schedule 3 was first introduced with the redesigned 2018 Form 1040 tax return.

There's no dedicated line on Schedule 3 for the Credit for the Elderly or Disabled. You should therefore enter the amount of your credit on line 6, ambiguously captioned, "Other Credits from Form..." Check box 6c, then enter "Sch R" on the line next to it and the amount of your credit in the last column. The total of all your nonrefundable credits on Schedule 3 then transfers to line 13b of your Form 1040.

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