There are a number of tax deductions and exclusions for people who are on SSDI or SSI as well as special rules for tax-advantaged savings and retirement accounts. These are in addition to several tax credits that recipients of disability benefits are eligible for.
First we'll look at deductions. A tax deduction reduces your taxable income, so the more deductions you have, the less income you’ll have to be taxed, and the less tax you’ll have to pay. The amount a deduction will save depends on your top tax rate. For example, if you’re in the 12% tax bracket, a $100 deduction will save you $12 in income tax.
If you’re blind (or over 65) on the last day of the year, you qualify for a larger "standard deduction." The standard deduction is a specified dollar amount you are allowed to deduct each year to account for personal expenses such as medical expenses, home mortgage interest and property taxes, and charitable contributions. You take the standard deduction instead of totaling up and deducting your actual personal expenses.
The amount you are allowed to deduct depends on your filing status and is adjusted for inflation each year. For instance, in 2019, the standard deduction for a single person is $12,200.
If you’re blind or over 65 and single, you get a $1,600 increase. Thus, your standard deduction would be $13,800 for 2019. You don’t need to file a tax return if your total income is less than this amount.
To qualify for the larger standard deduction, the IRS uses a definition similar to Social Security's: you must not be able to see better than 20/200 in the better eye with glasses or contact lenses, or your field of vision must be 20 degrees or less.
If you have a disability that limits your ability to work or substantially limits a major life activity, such as walking, breathing, learning, or using your hands, you can deduct your impairment-related work expenses (IRWE) from employment income or self-employment income. IRWEs are the costs of disability-related services that are needed for you to do your work. For example, a person with low vision could deduct the cost of Braille translation of work materials and a person who is hard of hearing could deduct the cost of a text telephone or assistive computer software.
If you work as an employee, you can deduct these expenses only if you itemize your personal deductions on IRS Schedule A instead of taking the standard deduction. Starting in 2018, the Tax Cuts and Jobs Act increased the standard deduction by a large amount, so it's likely that fewer people will claim IRWEs (you should itemize only if all your personal deductions exceed the standard deduction). If you do itemize, you can deduct the full amount of your unreimbursed impairment-related expenses from your income.
If you're self-employed, you can deduct IRWEs as business expenses on IRS Schedule C. They are deductible in full. They not only reduce your income taxes, but your self-employment (Social Security and Medicare) taxes as well.
Impairment-related work expenses can also be deducted from your income for benefit eligibility purposes. Social Security will consider IRWEs (and blind work expenses, or BWEs) when it assesses whether your work is substantial gainful activity (SGA) or whether your income is above the SSI income limits. In addition, IRWEs will be considered when you're applying for Medicaid or Medicare Part D subsidies.
Next we'll look at exclusions, income that does not need to be included on your tax return.
All of your Supplemental Security Income (SSI) benefits are excluded from your income, making them not taxable. You should not include them in your income when you prepare your tax return (if you're required to file a return).
You're able to exclude half of your SSDI benefits from your income. And your Social Security disability benefits (SSDI) are partly taxable only if you (and your spouse) earn enough income in addition to your benefits.
To know whether you might be subject to income taxes, you have to figure your combined income. To do this, add one-half of the total Social Security benefits you received during the year to all your other income. You’ll have to pay tax on part of your benefits if your combined income exceeds $25,000 if you’re single or $32,000 if you’re married.
The actual amount of income tax you have to pay on your benefits depends on your top “marginal” tax rate. For most people receiving SSDI, the top rate would be 10% to 22%. Many states also totally or partially exclude SSDI income. For more information, see our articles on federal taxation of Social Security benefits and state taxation of Social Security benefits.
The IRS has special rules for people with disabilities who need to withdraw money early from their retirement accounts, and also supports a relatively new tax-advantaged savings account for people who were disabled by age 26.
ABLE accounts (named for the Achieving a Better Life Experience Act) are special tax-advantaged savings accounts for people with disabilities. If you became blind or disabled before age 26, you can establish an ABLE Account, or others can do so on your behalf. Contributions to an ABLE account don't affect your eligibility to receive SSI, SNAP (food stamps), or Medicaid benefits, which are usually available only to people with financial assets of $2,000 or less. (However, you will lose your eligibility to receive SSI cash benefits if you accrue more than $100,000 in your ABLE account.)
Contributions to ABLE accounts aren't federally tax deductible, but some states, including Iowa, Maryland, Michigan, Nebraska, Ohio, Oregon, and Virginia, allow a deduction against the state income tax.
The money in your ABLE account or any interest it earns is not taxed. You can withdraw the money in your account at any time tax-free to pay for education, housing, transportation, employment training and support, assistive technology, personal support services (such as home health aides), health care expenses, financial management and administrative services, legal fees, and funeral expenses.
For more information on ABLE accounts, see our article on ABLE savings accounts.
Generally, if you take a distribution from a retirement plan before you turn 59 ½, you'll have to pay a penalty of 10% for "early distribution"—in addition to regular income tax. Individuals with qualifying disabilities, however, get an exception from the 10% early distribution penalty. The IRS gives a break to those who are totally and permanently disabled and need to take money out of IRAs, 401(k) plans and other qualified plans, and SEP, SIMPLE IRA, and SARSEP plans. For more information, see our article on the disability exception to the early distribution tax.
Read on to find out about tax credits for people with disabilities.
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