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Analytic Rehabilitation

Internal Revenue Service Publication 907 Excerpts

Tax Highlights for Persons with Disabilities
For use in preparing 2002 Returns
Introduction

This publication gives you a brief introduction to certain parts of the tax law of particular interest to people with disabilities and those who care for people with disabilities.

It includes highlights about:

You will find most of the information you need to complete your tax return in your form instruction booklet. If you need additional information, you may want to order a free tax publication. You may also want to take advantage of the other free tax help services that IRS provides. 

Income

All income is taxable unless it is specifically excluded by law. The following discussions highlight some income items (both taxable and nontaxable) that are of particular interest to people with disabilities and those who care for people with disabilities.

Dependent Care Benefits 

You can exclude from income benefits provided under your employer’s qualified dependent care assistance plan. You may be able to exclude up to $5,000. The care must be provided for your dependent under the age of 13 or your spouse or dependent who is not able to care for himself or herself.

For information about excluding benefits on Form 1040, get Form 2441, Child and Dependent Care Expenses, and its instructions. For information about excluding benefits on Form 1040A, get Schedule 2 (Form 1040A), Child and Dependent Care Expenses for Form 1040A Filers.

Social Security and Equivalent Tier 1 Railroad Retirement Benefits

If you received social security or equivalent tier 1 railroad retirement benefits during the year, part of the amount you received may be taxable.

Are any of your benefits taxable? If the only income you received during the year was your social security or equivalent tier 1 railroad retirement benefits, your benefits generally are not taxable and you probably do not have to file a return.

If you received income during the year in addition to social security or equivalent tier 1 railroad retirement benefits, part of your benefits may be taxable if all of your other income, including tax-exempt interest, plus half of your benefits are more than:

For more information, see the instructions for lines 20a and 20b (Form 1040) or lines 14a and 14b (Form 1040A). Publication 915, Social Security and Equivalent Railroad Retirement Benefits, contains more detailed information.

Supplemental security income (SSI) payments. Social security benefits do not include SSI payments, which are not taxable. Do not include these payments in your income.

Disability Pensions. Generally, you must report as income any amount you receive for your disability through an accident or health insurance plan that is paid for by your employer. If both you and your employer pay for the plan, report as income only the amount you receive for your disability that is due to your employer’s payments. Your employer should be able to give you specific details about your pension plan and tell you the amount you paid for your disability pension.

If you paid the entire cost of the plan, do not report as income any amounts you get from the plan for your disability. See Publication 525, Taxable and Nontaxable Income, for more information.

Military and Government Disability Pensions. Generally, you must report disability pensions as income, but do not include certain military and government disability pensions. For information about military and government disability pensions, see Publication 525.

VA disability benefits. Do not include disability benefits you receive from the Department of Veterans Affairs (VA) in your gross income. If you are a military retiree and do not receive your disability benefits from the VA, do not include in your income the amount of disability benefits equal to the VA benefits to which you are entitled.

Do not include in your income any veterans’ benefits paid under any law, regulation, or administrative practice administered by the VA. These include:

Rehabilitative program payments. VA payments to hospital patients and resident veterans for their services under the VA’s therapeutic or rehabilitative programs are included as income other than wages. These payments are reported on line 21 of Form 1040.

Other Payments

You may receive other payments that are related to your disability. The following payments are not taxable.

Long-Term Care Insurance

Qualified long-term care insurance contracts are generally treated as accident and health insurance contracts.

Amounts you receive from them (other than policyholder dividends or a premium refund) generally are excludable from income as amounts received for personal injury or sickness. More detailed information can be found in Publication 525.

Accelerated Death Benefits

You can exclude from income accelerated death benefits you receive on the life of an insured individual if certain requirements are met. Accelerated death benefits are amounts received under a life insurance contract before the death of the insured. These benefits also include amounts received on the sale or assignment of the contract to a viatical settlement provider. This exclusion applies only if the insured was a terminally ill individual or a chronically ill individual. For more information, see Publication 525.

Itemized Deductions

If you file Form 1040, you generally can either claim the standard deduction or itemize your deductions. You must use Form 1040 Schedule A to itemize your deductions. See your form instructions for information on the standard deduction and the deductions you can itemize. The following discussions highlight some itemized deductions that are of particular interest to persons with disabilities.

Medical Expenses

You can deduct medical and dental expenses for you, your spouse, and your dependents.

Medical expenses include payments you make for the diagnosis, cure, mitigation, treatment, or prevention of disease and for treatment affecting any part or function of the body. They also include the cost of transportation for needed medical care and payments for medical insurance. 

You can deduct only the part of your medical and dental expenses that is more than 7.5% of your adjusted gross income shown on line 36, Form 1040.

The following list contains only highlights. For more detailed information, get Publication 502, Medical and Dental Expenses.

Special Items and Equipment

Your medical expenses can include payments for any of the following items.

Improvements to your home that do increase its value, if the main purpose is medical care, may be partly included as a medical expense. See Publication 502 for more information.

Impairment-Related Work Expenses

If you are an employee and have a physical or mental disability that functionally limits your employment, or a physical or mental impairment that substantially limits one or more of your major life activities, you may be able to claim impairment-related work expenses. These are your allowable business expenses for attendant care at your workplace and other expenses in connection with your workplace that are necessary for you to work. 

If you have impairment-related work expenses, complete Form 2106, Employee Business Expenses, or Form 2106–EZ, Un-reimbursed Employee Business Expenses, and attach it to your Form 1040.

Generally, employee business expenses are subject to a 2%-of-adjusted-gross-income limit. However, impairment-related work expenses are not subject to the 2% limit.

Tax Credits

This discussion highlights three tax credits that may be of interest to people with disabilities and those who care for people with disabilities.

Child and Dependent Care Credit

Generally, if you pay someone to care for either your dependent under age 13 or your spouse or dependent who is not able to care for himself or herself, you may be able to get a credit of up to 30% of your expenses. To qualify, you must pay these expenses so you can work or look for work.

You can claim the credit on Form 1040 or 1040A. You figure the credit on Form 2441 (Form 1040) or Schedule 2 (Form 1040A).

For more information, see the instructions for line 46 (Form 1040) or line 29 (Form 1040A). Publication 503, Child and Dependent Care Expenses, contains more detailed information.

Credit for the Elderly or the Disabled

You may be able to claim this credit if you are 65 or older or if you are under 65 and you retired on permanent and total disability.

You can claim the credit on Form 1040 or 1040A. You figure the credit on Schedule R (Form 1040) or on Schedule 3 (Form 1040A).

For more information, see the instructions for line 47 (Form 1040) or line 30 (Form 1040A). Publication 524, Credit for the Elderly or the Disabled, contains more detailed information.

Earned Income Credit

This credit is based on the amount of your earned income. But you can get the credit only if your earned income for 2002 was less than:

To figure the credit, use the worksheet in the instructions for Form 1040, 1040A, or 1040EZ. If you have a qualifying child, also complete Schedule EIC, Earned Income Credit, and attach it to your Form 1040 or 1040A.

You cannot use Form 1040EZ if you have a qualifying child.

Qualifying child. A qualifying child must be under age 19 at the end of 2002, or a full-time student under age 24 at the end of 2002, or permanently and totally disabled at any time during 2002, regardless of age.

Earned income. If you are retired on disability, benefits you receive under your employer’s disability retirement plan are considered earned income until you reach minimum retirement age. However, payments you received from a disability insurance policy that you paid the premiums for are not earned income.

More information. For more information, including all the requirements to claim the credit, see the instructions for line 64 (Form 1040), line 41 (Form 1040A), or line 8 (Form 1040EZ). Publication 596, Earned Income Credit (EIC), contains more detailed information.

Household Employers

Generally, if you pay someone to work in your home, such as a baby sitter or housekeeper, you may be a household employer who has to pay employment taxes. A person you hire through an agency is not your employee if the agency controls what work is done, and how it is done. This control could include setting the fee, requiring regular reports, and providing rules of conduct and appearance. In this case you do not have to pay employment taxes on the amount you pay. But if you control what work is done and how it is done, the worker is your employee. If a worker is your employee, it does not matter that you hired the worker through an agency or from a list provided by an agency.

To find out if you have to pay employment taxes, see Publication 926, Household Employer's Tax Guide.

Business Tax Incentives

If you own or operate a business, or you are looking for work, you should be aware of three tax incentives for businesses to help persons with disabilities. They are:

• Deduction for costs of removing barriers to the disabled and the elderly—This is a deduction a business can take for making a facility or public transportation vehicle more accessible to and usable by persons who are disabled or elderly. See chapter 8 in Publication 535, Business Expenses.

• Disabled access credit—This is a tax credit for an eligible small business that pays or incurs expenses to provide access to persons with disabilities. The expenses must be to enable the eligible small business to comply with the Americans with Disabilities Act of 1990. See the instructions for Form 8826, Disabled Access Credit, for more information.

• Work opportunity credit—This is a tax credit for businesses that hire individuals from certain targeted groups. One targeted group consists of vocational rehabilitation referrals. These are individuals who have a physical or mental disability that results in a substantial handicap to employment. See the instructions for Form 5884, Work Opportunity Credit, for more information.

The above information is excerpted from IRS Publication 907 Tax Highlights for Persons With Disabilities. The IRS website is available, here.