Taxpayers who are disabled are still subject to income tax, except in situations where the law specifically excludes certain income.
If you were using disability while you retired, you have to include the pension you receive from your employer when you file a tax return. You are required to report disability income as part of your wages until you reach the minimum retirement age. This age is usually at what point you can receive your regular retirement benefits if you are not disabled. After you reach this age, all disability payments become taxable as pension/annuity. Disability pensions are generally subject to taxation, however there are some governmental and military disability pensions, such as those provided by the Department of Veteran’s Affairs are not taxed. Other non-taxed disability payments include public welfare worker’s compensation payments, compensatory damages, permanent disfigurement compensation, and accident and health insurance benefits.
You income is typically used to determine the amount of taxable benefits from Social Security or tier 1 Railroad Retirement. The calculation adds one half of you benefits to your total income, which includes tax exempt interest. If the total income calculated is equal or greater than $25,000 ($32,000 joint filers) you’ll likely pay taxes on 85% of your benefits.
If a person works in your home and you are responsible for paying them and telling them how to work, you’ll likely be considered a home employer. You’ll need to pay employment taxes such as Social Security and Medicare, as well as unemployment tax, in these situations.
Disabled taxpayers may qualify for deductions that can reduce tax liability. These deductions can be itemized on a Schedule A, in which you are then able to deduct medical expenses which are more than 7.5% of your adjusted gross income. These types of medical expenses can include:
- Insurance premiums for long term care
- Specialized schooling or home for the disabled
- Hearing aids
- Telephone equipment for the hearing impaired as well as other specialized equipment for communication
- Cost and care of a service dog
- Wheelchair costs
- Home improvements that do not affect the home’s value, but are necessary to accommodate the disabled (ramps, support bars, specialized alarm systems, etc.)
You may be able to deduct disability related work expenses. Generally, this includes anything you need to work, such as specialized care, etc. If you incur any of these expenses, you should keep all your receipts to substantiate these expenses. Also, consider your eligibility for the Credit for the Elderly or Disabled. Also, benefits received under the disability retirement plan from your employer are considered to be earned income if you calculate the Earned Income Credit (EIC).