Elderly or Disabled Tax Credit – A Primer

A tax credit may be available if you are 65 years of age prior to December 31, 2009 or under 65 but retired and were permanently and totally disabled on the date you retired. Regrettably, this credit is not as significant as some of the other tax credits that are available to qualifying individuals. Notwithstanding the size of the credit, like any tax credit, it should not be overlooked since it could result in some unanticipated cash for you.

How the Elderly Credit is Calculated The credit is equal to 15% of an applicable \”initial\” amount based on your filing status i.e. $5,000 for a single taxpayer, $7,500 for married taxpayers filing a joint return where each spouse is qualified. The initial credit is then decreased by certain nontaxable pensions and benefits such as pension, disability benefits or annuities that are not included in adjusted gross income. The initial credit is also further decreased by one half of the excess of your adjusted gross income over certain predetermined levels, based on your filing status. The levels are for a single taxpayer is $7,500, married taxpayers is $10,000 and married taxpayers individually filing separately is $5,000.The credit is calculated by multiplying the adjusted \”initial\” amount by 15%.

Nontaxable Benefits and Pensions You should be cautious when listing the nontaxable amounts received and reflected on your tax return. These amounts are confirmed with information supplied by other government agencies by the Internal Revenue Service. Nontaxable benefits and pensions examples are (a)nontaxable pension or annuity payments or disability benefits that are paid under a law administered by the V.A.,(b) nontaxable railroad retirement pension payments treated as social security,(c)nontaxable social security payments, and (d)annuity or pension payments or disability benefits which not included in income pursuant to any provision of federal law other than the Internal Revenue Code.

How to Determine the Disability Credit For taxpayers who are permanently and totally disabled and under the age of 65 by the end of the year, the applicable \”initial\” amount may not exceed the amount of the disability income you received during 2009. There are special rules to compute the \”initial\” amounts when one spouse is under the age of 65 and to determine and support the permanently and totally disability status that is being claimed.

Limitations to the Credit In order to determine if a taxpayer can claim the credit, the taxpayer must consider two income limits. The first income limit is the amount of your adjusted gross income. The second income limit is the amount of non-taxable Social Security and other non-taxable pensions the taxpayer received. The amount of credit the taxpayer can claim is generally limited to the amount of the tax. A taxpayer may not take this credit if the adjusted gross income is equal to and exceeds the following (a) $17,500 if single, head of household or qualifying widow(er) with dependent child, (b)$20,000 if married filing jointly and one spouse is eligible for the credit, (c) $25,000 if married filing jointly and both spouses are eligible for the credit and (d) $12,500 if married filing separately. Depending on your filing status, you cannot take the credit if you received certain nontaxable benefits ranging from $3,750 to $7,500.

Claiming the Credit The credit is computed on Schedule R form 1040 or form 1040A. This credit is not available for individuals that file form 1040EZ. In the case you file a 1040EZ, just file the allowed forms, Form 1040A or 1040.

For such a small credit there are complex rules to determine exclusions, credit amounts and your filing status. Please make reference to Internal Revenue Service Publication 52 for more detailed information. This article is not intended to provide legal or accounting advice. Because the tax laws are complex, change constantly and each situation is unique, the reader is advised to do his or her own due diligence and consult with professionals in these areas.

To obtain more about how we can assist you determine if you are eligible for the Elderly or Disabled Tax Credit and other available income tax credits and about our reasonably priced paperless and internet based approach to tax preparation at affordable prices . Sandor(Sandy) E. Lenner,M.B.A. – C.P.A. has provided accounting and business services for over 35 years and works part-time at his wife\’s CPA firm