Credit for the Elderly or Disabled

How to Complete Schedule R for the Elderly and Disabled Tax Credit

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People who are 65 or older and those who have retired early due to disability may be eligible for a federal tax credit. The credit for the elderly and the disabled reduces federal income taxes related to disability income.

Who Qualifies for Elderly and Disabled Credit?

The taxpayer must be a U.S. citizen or resident alien who: 

  • Has reached age 65 before the end of the tax year, or
  • Has retired on disability before the end of the tax year and was permanently and totally disabled when he retired
    • You’re under age 65 at the end of year but you retired on permanent and total disability, you received taxable disability income, and you have not yet reached mandatory retirement age as of January 1 of the new tax year

    Age Requirement 

    You are considered age 65 on the day before your 65th birthday. If you were born on January 1, 1951, you were considered to be age 65 at the end of 2015.

    Disability Requirement 

    Internal Revenue Code section 22paragraph (e) (3) states that “An individual is permanently and totally disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. An individual shall not be considered to be permanently and totally disabled unless he furnishes proof of the existence thereof in such form and manner, and at such times, as the Secretary may require."

    In other words, you cannot engage in any substantial gainful activity due to suffering a physical or mental condition. A qualified physician must determine that the condition has lasted or can be expected to last continuously for at least a year or can be expected to result in death.

    Retiring on Disability 

    "Even if you don't retire formally, you may be considered retired on disability when you have stopped working because of your disability,” according to IRS Publication 524, Credit for the Elderly or the Disabled.

     

    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 in lieu 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. A lump sum payment for accrued annual leave that you receive when you retire on disability is a salary payment and isn't disability income. Disability income doesn't include amounts you receive after you reach mandatory retirement age. Mandatory retirement age is the age set by your employer at which time you would have had to retire had you not become disabled.

    Income Limits

    In addition to the other qualifying factors, a taxpayer’s adjusted gross income must be lesser than or equal to the following amounts:

    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 calculated as 15% of the initial amount less the total of nontaxable Social Security and certain other nontaxable pensions, annuities or disability benefits plus one-half of your adjusted gross income less the AGI limitation amount. To simplify, the equation would like this: 15 percent x A – B + ½ C – D. 

    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:

    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 Portion of Pension Benefits 

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

    • Social Security benefits: the nontaxable portion is the difference between Form 1040 line 20a and 20b
    • Railroad retirement benefits: the nontaxable portion of Tier 1 benefits treated as Social Security
    • Worker's compensation benefits: According to the instructions for line 13a of Schedule R, “if your Social Security or equivalent railroad retirement benefits are reduced because of workers' compensation benefits, treat the workers' compensation benefits as Social Security benefits"
    • Veteran's pensions
    • Any other pension, annuity, or disability benefit that is excluded from income

    The following items 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,” according to the instructions for line 13b of Schedule R

    Your Adjusted Gross Income 

    You can find your adjusted gross income on line 37 of Form 1040 or on line 21 of Form 1040A. 

    Adjusted Gross Income Limitation Amount

    If...

    Adjusted gross income limitation amount...

    Single

    $7,500

    Head of household

    $7,500

    Qualifying widow(er) with dependent child

    $7,500

    Married filing jointly

    $10,000

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

    $5,000

    Sources for the calculations are adapted from Schedule R and Publication 524, Credit for the Elderly or the Disabled, IRS.gov.

    NOTE: Tax laws change periodically, and you should consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and is not a substitute for tax advice.