Break out of the tax web.
April 15 is right around the corner. Whether you're a worker with a disability, a caregiver, or an employer, you'll be better prepared after you read this article.
The Internal Revenue Code (IRC) contains a variety of tax breaks for taxpayers with disabilities, those who care for them, and businesses serving customers with disabilities or employing disabled workers. With an increasing number of people with disabilities in the work force, use of these tax benefits will become more commonplace. The following is a quick rundown of the main ones.
IMPAIRMENT-RELATED WORK EXPENSES
Although unreimbursed employee business expenses are deductible only as miscellaneous itemized deductions subject to the 2% adjusted gross income (AGI) floor, disabled employees' impairment-related work expenses are fully deductible (Code Sec. 67[b]). These are expenses for attendant-care services at the place of employment and other business-related expenses connected with the workplace and necessary for the person to be able to work. Claim these expenses on Forms 2106 or 2106-EZ.
CREDIT FOR PERMANENT AND TOTAL DISABILITY
The maximum $1,125 credit under Code Sec. 22 is available for people under age 65, only if they are retired on permanent and total disability with no taxable disability benefits and generally no more than $5,000 of nontaxable Social Security or other benefits and limited amounts of other income. Receipt of tax-free Social Security or veterans' benefits and AGI above certain thresholds reduces the credit amount. Claim the credit on Schedule R (Form 1040) or Schedule 3 (Form 1040A).
Most taxpayers are unable to claim medical expenses because of the 7.5% of AGI floor under medical deductions. However, since taxpayers with disabilities and those with dependents with disabilities generally have higher medical expenses, they are more likely to be able to claim a deduction.
* Nursing-home care. If medical-care availability is a principal reason for a disabled person's being in a nursing home, the entire cost--including meals and lodging--is considered a medical expense for deduction purposes. Whether maintenance costs incurred at an institution other than a hospital are deductible as medical expenses depends upon the condition of the person and the care received. If medical-care availability is not a principal reason for institutionalization, meal and lodging costs are not considered medical expenses. However, even in that case, nursing and other actual medical-care costs would be deductible.
* Special schools. The cost of a special school for a dependent with disabilities is considered a medical expense, if the principal reason for attendance is the facility's unique resources for alleviating the disability. The tuition cost for ordinary education that is incidental to the services at a special school and the cost of meals and lodging supplied by a special school also are medical expenses (Reg. Sec. 1.213-1[e][v][a]).
* Capital expenditures. Although capital expenditures usually can't be deducted, certain medical-related expenditures are considered medical expenses that can qualify for the deduction. Examples include the cost of eyeglasses, a seeing-eye dog, artificial teeth and limbs, wheelchairs, crutches, or even an air conditioner that is detachable from the property and purchased only for the use of a sick person (Reg. Sec. 1.213-1[e][iii]). Similarly, when a wheelchair user buys a car specifically designed to compensate for a disability, the portion of the price attributable to its special design is a medical expense (Rev. Rul. 76-80, 1976 CB 71).
Capital improvements to residences also may be medical expenses to the extent they exceed the increase in the related property's value if the expenditure is related directly to medical care. For example, say a taxpayer follows a physican's advice and installs an elevator in his or her home so that a spouse, who has heart disease, won't have to climb stairs. The difference between the elevator's cost and the resulting increase in the home's value would be a medical expense.
The following capital expenditures incurred by people with physical impairments to remove structural barriers in their residences are among those not considered adding to the personal residences' value: constructing ramps, widening doorways and hallways, adding railings and support bars, lowering cabinets, and adjusting electrical outlets and fixtures. Thus, their entire cost is considered a medical expense (Rev. Rul. 87-106, 1987-2 CB 67).
Taxpayers who reached age 55 before selling their principal residence may exclude up to a $125,000 gain from income if they owned and occupied the property as their principal residence for at least three years within the five-year period ending on the sale date. There is an exception to the three-out-of-five-year rule for someone who has owned and used the home as a principal residence for at least one year during the five-year period: If that person becomes physically or mentally incapable of self-care any time within the period during which the taxpayer owns the property and resides in a facility (including a nursing home) to care for individuals who have become mentally or physically incapable of selfcare, time spent in the facility is treated as time the property was occupied as a principal residence (Code Sec. 121[d]).
Caution: If a person hasn't satisfied the three-out-of-five-year requirement before entering a care facility, the home sale won't qualify for the exclusion if the sale occurs before the three-year test is deemed met.
Taxpayers incurring expenses for household service, day-care centers, etc., to care for physically or mentally impaired dependents or spouses to enable the taxpayers to work are entitled to a nonrefundable tax credit of 20% of up to $2,400 of qualifying expenses for one dependent or $4,800 for two or more. (Credit percentages are higher for taxpayers with AGIs of $28.000 or less.) Married couples must tile a joint return to be eligible for the credit (Code Sec. 21).
As an alternative to the dependent-care credit, taxpayers whose employers have a dependent-care assistance plan can exclude up to $5.000 of assistance for the care of a spouse or dependent incapable of self-care (Code Sec. 129). Form 1040 filers claim the credit or exclusion on Form 2441; Form 1040A filers use Schedule 2.
SOCIAL SECURITY DISABILITY BENEFITS
Social Security benefits, including those for disabilities, are tax-free to lower-income recipients (Code Sec. 86[d]). They are completely exempt if the recipients' provisional income (which besides regular AGI includes one half of the Social Security benefit and nontaxable interest income) is below $25,000 for single taxpayers or $32,000 for married couples filing jointly. If provisional income is above these thresholds, some of the benefits still escape tax.
At the second stage, the lesser of half the excess income or half the disability benefit is included in income. For single taxpayers with provisional incomes above $34,000 or married taxpayers above $44,000, as much as 85% of benefits may be subject to tax (Code Sec. 861al). Supplemental Security Income (SSI) payments are net subject to federal income tax.
WORKERS' COMPENSATION INCOME
Workers' comp received due to job-related sickness or injury is not subject to federal income tax (Code Sec. 104[a]).
Compensatory damages received for injury or illness is exempt from federal income tax. However, the exemption generally does not apply to punitive damages (Code Sec. 104[a]).
ACCIDENT AND HEALTH BENEFITS
Reimbursed medical expenses and other benefits received under an employer-paid accident or health-insurance policy generally are exempt from tax (Code Sec. 105[b]). However, benefits other than these, such as disability income attributable to employer premiums, generally are taxable (Code Sec. 105). Compensation for permanent loss, or loss of use, of a member or function of the body or permanent disfigurement also is tax exempt (Code Sec. 105[c]).
Veterans' disability compensation and pension payments for disabilities are excludable from gross income. Grants for wheelchair-accessible homes and for specially designed motor vehicles are also not taxable (Code Sec. 104[a]; Code Sec. 134[a]).
BUSINESS-RELATED TAX BENEFITS
DEDUCTIONS FOR BARRIER REMOVAL
Under Code Sec. 190, a business can deduct up to $15,000 of expense per year for removing architectural and transportation barriers to make the property more accessible to people who are elderly or have disabilities.
Under Code Sec. 44, small businesses having gross receipts of no more than $1 million or no more than 30 full-time employees for the previous tax year may elect (on Form 8826) to take a tax credit for 50% of up to $10,000 of annual expenditures in excess of $250 to remove barriers, provide aids for people with hearing and visual impairments, acquire or modify equipment or devices for people with disabilities, or similar services, modifications, materials, or equipment.
WORK-OPPORTUNITY TAX CREDIT
This credit for 35% of up to $6,000 of first-year wages paid to newly hired members of targeted hard-to-employ groups is available to employees who began work after September 30, 1996, and before October 1, 1997. It is available for wages paid to certain new hires, such as veterans with disabilities or vocational-rehabilitation referrals.
When filing taxes, business owners and individuals use different approaches. As always, if you have questions, contact your tax consultant, your local Internal Revenue Service office, or the Office of Chief Counsel, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20224. (800) 829-1040 / 829-4059 (TDD) / (202) 566-3292.
With a little knowledge and planning, you cun break out of the tax web!
Are you frustrated in your attempts to control your own tax-planning? Do you doubt your ability to cut through all the legal and accounting jargon?
What's your tax-break IQ? Take the following simple multiple-choice quiz:
Tax breaks are available for
(a) People with disabilities (b) Individuals caring for people with disabilities (c) Businesses employing workers with or serving customers with disabilities (d) Service animals making more than $10,000 per year (e) air conditioners installed solely for medical reasons (f) The special-design portion of a car
If you answered(d), you definitely should read the rest of this article! If you responded (a), (b), (c), (e), and (f), you win the jackpot and are already well on your way to finding some breaks at tax time.
RELATED ARTICLE: FYI
AGI: Adjusted gross income. Gross income minus deductions.
CFR: Code of Federal Regulations. Contains the final text of all regulations implementing and interpreting federal law and embodying the responsibilities, procedures, and objectives of all federal agencies.
IRC: Internal Revenue Code. Comprises Title 26 of the U.S. Code (described below).
USC: U.S. Code. The complete codification of federal statutes. Many libraries contain the U.S. Code Annotated (USCA), which, although unofficial, is useful for information on federal laws. It also contains "nots of decision" listing court decisions involving each section.
IRS Publication 334 provides tax information for small businesses. IRS Publication 907, "Tax Highlights for Persons With Disabilities," contains information for individual tax preparation. To order forms and publications, call (800) 829-3676/829-4059(TDD).
"Tax Incentives: Assisting Accessibility," a brochure for business owners, is available from the Paralyzed Veterans of America Advocacy Program, 801 Eighteenth Street, NW, Washington, DC 20006. (800) 424-8200 / (202) 872-1300.