The Credit for the Elderly or Disabled is intended to help filers living on fixed incomes with their income tax bill. The credit allows qualified taxpayers to claim a nonrefundable tax credit that will directly lower the income tax that they may owe.
A “Qualified Individual” for the elderly or disabled tax credit is:
- Age 65 or older at the end of the tax year.
- If under age 65, then all 3 conditions must apply:
- Retired on permanent and total disability
- Have taxable disability income
- At the start of the tax year, the individual had not yet reached mandatory retirement age (this applies to certain regulated professions, such as pilots, but generally inapplicable to most workers).
Just like most tax credits, the Credit for the Elderly or Disabled is only available to US citizens or, in some circumstances, resident aliens. A nonrefundable credit means that claiming it directly lowers your tax due, but does not return additional money back, unlike refundable credits like the Earned Income Tax Credit.
Income limits also apply based on two metrics, the individual’s adjusted gross income (AGI), and amount of nontaxable social security and other nontaxable pension income received. The AGI limit is currently set at $17,500 (2019) for single, and up to $25,000 (2019) for married filing jointly and both spouses are qualified individuals. The limits to nontaxable income received are based on your filing status, $5,000 (2019) for single, and up to $7,500 (2019) for married filing jointly and both spouses are qualified individuals. The credit itself is also based on filing status and mirror the limits for nontaxable income, $5,000 for single and up to $7,500 for married filing jointly. The Schedule R form for the 1040 details the steps, but the formula to determine can be summed up as:
Initial credit based on filing status – (nontaxable soc security & other nontaxable income + excess AGI*) = remaining amount must be above zero
*Excess AGI is calculated as [ AGI – a set amount depending on filing status ($7,500 for single, $5,000 for MfS, $10k for MfJ) / 2]
Let’s take an example.
Dwayne is 60 years old, single, retired & on permanent disability. When preparing his Form 1040, he determines his AGI is $15,500 and has nontaxable social security income of $1,500. Using Schedule R to claim the elderly or disabled credit, he figures if qualifies for the credit.
$5,000 initial income reduction (single) – ($1,500 + [$15,500 – $7,500]/2) = ($500)
Dwayne cannot claim the credit because his AGI and nontaxable income push him above the initial credit amount.
Filers who get to this step (line 19 on Schedule R) without a negative number will multiply that amount by 15%, then reference the Credit Limit Worksheet on the Schedule R Instructions. Any foreign tax credit claimed or dependent care expenses claimed on Schedule 3 are subtracted against the line 19 calculation and the remaining amount is the credit to be claimed.
The Credit for the Elderly or Disabled is another example of tax credits available that qualified taxpayers should utilize, but do not necessarily know about without some pointers from tax people. Individuals and business owners, whose forte is something other than tax, may find much to benefit in consulting with tax experts, like us at MiklosCPA. We have helped many small and emerging businesses with their tax and accounting needs so they can focus on what they do best and reach their business ambitions. Interested in learning more in how we can help your business? Let’s chat. Also, follow our social media pages for more future useful tax tidbits like this article.