A person is considered disabled by the IRS if they have an impairment that prevents them from consistent employment. The condition could be a physical or mental impairment or a combination of both. In order to qualify for disability tax breaks, a person must have proof of their impairment. This could include a doctor’s prescription or a letter from a government agency certifying their disability. These tax breaks include tax credits and deductions. A tax credit reduces the amount of taxes you owe dollar-for-dollar. A tax deduction reduces your taxable income based on certain criteria.
If a disabled person is legally blind, they can claim a special deduction for medical expenses and out-of-pocket expenses not covered by insurance. They can also take advantage of the Child and Dependent Care Credit, which can be used to help pay for day care while they work or look for work. To learn more about these and other tax breaks for people with disabilities, see IRS Publication 501, Exemptions, Standard Deduction, and Filing InformationPDF and Pub. 525, Taxable and Nontaxable Income.
Tax Credits and Deductions
Any of the same deductions and credits available to everyone are also available to disabled people. For example, a person with a disability can claim medical expenses that aren’t covered by insurance. This includes items like prescriptions, medical equipment, and transportation to doctors’ appointments.
If you have a disability that prevents you from working, you may qualify for the Disabled Access Credit for Small Businesses. This credit helps cover the cost of making changes to your home or vehicle to accommodate your disability. This could include installing a wheelchair ramp or chair lift, adding grab bars, widening doorways and aisles, and modifying hardware, electrical fixtures, and other home parts.
Disability benefits received from a private disability insurance policy are typically taxable, just like any other wages. This can include a short-term disability plan (usually only one to two weeks), an individual long-term disability insurance plan, or a group disability policy your employer pays for with pre-tax money. In addition, Social Security disability benefits are taxable, and most pensions you receive from the military or your employer based on years of service.
Disability tax credits and deductions are designed to give millions of Americans financial relief from the high costs of living with a disability.
Some states also offer special tax breaks for disabled people. For example, Tennessee offers a tax credit to employers who hire people with disabilities. This credit can be worth up to $20,000 per person hired.
Another way to get a break on taxes as a disabled person is to have a third-party special needs trust established for the disabled. This can be particularly helpful a disabled person has received a personal injury settlement or unrestricted inheritance. In most cases, this type of trust will meet the definition of a “Qualified Disability Trust” and can be used to avoid paying unnecessary tax.
Disability Insurance Coverage
Many disabled people find themselves paying income taxes – but there are many deductions and credits that can make the process much easier. The tax breaks vary in nature, depending on the type of disability benefits you receive.
One common tax break is for long-term disability insurance coverage. When you obtain coverage from your employer, it is typically less expensive than obtaining a private policy, and the premiums are often partially paid with pre-tax dollars. The downside is that you will lose your coverage if you leave your job.
The IRS also offers a variety of disability-related deductions, including the cost of adaptive equipment like wheelchairs and communication devices. These expenses can be deducted from your income if you itemize deductions on IRS Schedule A, but far fewer people will do this after the Tax Cuts and Jobs Act increased the standard deduction. People with blindness or low vision can also claim the expense of work-related services necessary to do their jobs, such as the cost of a Braille translator for reading documents and letters.
Other common disability-related deductions include the costs of making structural modifications to your home to accommodate your disability, including ramps, railings, chair lifts, and grab bars. However, these home improvements can only be claimed if they are made solely to accommodate a disability and cannot increase your property’s value. See IRS Publication 502 for details.
Private-sector businesses that make structural adaptations or other accommodations for employees with disabilities can qualify for Federal and state-based tax incentives. These incentives include the Work Opportunity Tax Credit (WOTC) and the Disabled Access Credit. The WOTC is designed to help employers hire individuals from target groups who have consistently faced barriers to employment. More information on this incentive and its requisite forms is available on the IRS website. The Disabled Access Credit provides a non-refundable credit for small businesses that incur expenditures for the purpose of providing accessibility to persons with disabilities. Eligible businesses are those that have fewer than 30 full-time employees and earn less than $1 million annually. See Form 8826 and the IRS guidance housed on its site for details.
People with disabilities may be eligible for a specialized retirement account called an ABLE account. The account allows people with disabilities to save money for future needs without paying taxes on the funds. It also helps them stay within their contribution limits. ABLE accounts are available through state programs, and each state has its own rules and regulations about who can contribute to the account.
Individuals who are disabled and receive SSDI or SSI benefits can gain from a variety of tax deductions, income exemptions, and special rules for tax-advantaged savings and retirement accounts. They can also benefit from a number of programs that offer help with living expenses, including supplemental needs allowances and housing assistance. Finally, beneficiaries of third-party special needs trusts can take advantage of a tax deduction that reduces the amount of taxes paid on their trust income.