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Chapter 34. Credit for the Elderly or the Disabled Introduction This chapter discusses: ∙ Who qualifies for the credit for the elderly or the disabled, and ∙ How to figure this credit. The maximum credit available is $1,125. You may be able to claim this credit if you: ∙ Are age 65 or older, or ∙ Are retired on permanent and total disability. You also must: ∙ File either Form 1040 or Form 1040A, and ∙ Fill out either Schedule R (Form 1040) or Schedule 3 (Form 1040A). Internal Revenue Service (IRS) will figure your credit. If you choose to have the IRS figure your tax on Form 1040 or Form 1040A, and you qualify for the credit for the elderly or the disabled, the IRS will also figure the credit for you. See Tax Figured by IRS in Chapter 31. Related publications and forms. This chapter refers to several publications and forms that you may need. The list of forms does not include Forms 1040, 1040A, and 1040EZ. For more information, you may want to order the following: Publication 524, Credit for the Elderly or the Disabled Publication 554, Tax Information for Older Americans Schedule 3 (Form 1040A), Credit for the Elderly or the Disabled for Form 1040A Filers Schedule R (Form 1040), Credit for the Elderly or the Disabled Can You Take the Credit? You can take the credit for the elderly or the disabled if you are a qualified individual. Qualified Individual You are a qualified individual for this credit if you are a U.S. citizen or resident and: 1) You are age 65 or older by the end of the tax year, or 2) You are under age 65 at the end of the tax year, and a) You are retired on permanent and total disability, b) You did not reach mandatory retirement age before 1992, and c) You received taxable disability benefits in 1992. Age 65. You are considered 65 on the day before your 65th birthday. Therefore, you are 65 by the end of 1992 if your 65th birthday is on January 1, 1993. U.S. citizen or resident. You must be a U.S. citizen or resident to claim the credit. Generally, you may not claim the credit if you were a nonresident alien at any time during the tax year. However, if you are a nonresident alien who is married to a U.S. citizen or resident at the end of the tax year and you both choose to be treated as U.S. residents and be taxed on your worldwide income, you may be able to claim the credit. Also, if you were a nonresident alien at the beginning of the year and a resident at the end of the year, and you were married to a U.S. citizen or resident at the end of the year, you may both choose to be treated as U.S. residents for the entire year and thus be allowed to claim the credit. For information on these choices, see Publication 519, U.S. Tax Guide for Aliens. Qualified Individual Under Age 65 If you are under 65, you may qualify for the credit only if you are retired on permanent and total disability. You are considered retired, even if you do not retire formally, when you have stopped working because of your disability. You are retired on permanent and total disability if: ∙ You were permanently and totally disabled when you retired, and ∙ You retired on disability before the close of the tax year. If you retired on disability before 1977, and were not permanently and totally disabled at that time, you can qualify for the credit if you were permanently and totally disabled on January 1, 1976, or January 1, 1977. Permanent and total disability. You are permanently and totally disabled if you cannot engage in any substantial gainful activity because of your physical or mental condition. A physician must certify that the condition has lasted or can be expected to last continuously for 12 months or more, or that the condition can be expected to result in death. See Physician's statement, later. Substantial gainful activity. Substantial gainful activity is the performance of significant duties over a reasonable period of time while working for pay or profit, or in work generally done for pay or profit. Full-time work or part-time work done at your employer's convenience, in a competitive work situation for at least the minimum wage, conclusively shows that you are able to engage in substantial gainful activity. The minimum wage is $3.80 an hour beginning April 1, 1990, and $4.25 an hour after March 31, 1991. Substantial gainful activity is not work you do to take care of yourself or your home. It is not unpaid work on hobbies, institutional therapy or training, school attendance, clubs, social programs, and similar activities. However, the kind of work you do may show that you are able to engage in substantial gainful activity. The fact that you have not worked for some time is not, in itself, conclusive evidence that you cannot engage in substantial gainful activity. The following examples illustrate the tests of substantial gainful activity. Example 1. Trisha, a sales clerk, retired on disability. She is 53 years old and now works as a full-time babysitter for the minimum wage. Even though Trisha is doing different work, she is able to do the duties of her new job in a full-time competitive work situation for the minimum wage. She is able to engage in substantial gainful activity and, therefore, cannot take the credit. Example 2. Tom, a bookkeeper, retired on disability. He is 59 years old and now drives a truck for a charitable organization. He sets his own hours and is not paid. Duties of this nature generally are performed for pay or profit. Some weeks he works 10 hours, and some weeks he works 40 hours. Over the year he averages 20 hours a week. The kind of work and his average hours a week conclusively show that Tom is able to engage in substantial gainful activity. This is true even though Tom is not paid and he sets his own hours. He cannot take the credit. Example 3. John, who retired on disability, took a job with a former employer on a trial basis. The purpose of the job was to see if John could do the work. The trial period lasted for 6 months during which John was paid the minimum wage. Because of John's disability, he was assigned only light duties of a nonproductive "make-work" nature. The activity was gainful because John was paid at least the minimum wage. But the activity was not substantial because his duties were nonproductive. These facts do not, by themselves, show that John is able to engage in substantial gainful activity. Example 4. Joan, who retired on disability from employment as a bookkeeper, lives with her sister who manages several motel units. Joan assisted her sister for one or two hours a day by performing duties such as washing dishes, answering phones, registering guests, and bookkeeping. Joan can select the time during the day when she feels most fit to perform the tasks undertaken. Work of this nature, performed off and on during the day at Joan's convenience, is not activity of a "substantial and gainful" nature even if she is paid for the work. The performance of these duties does not, of itself, show that Joan is able to engage in substantial gainful activity. Sheltered employment. Certain work offered at qualified locations to physically or mentally impaired persons is considered sheltered employment. These locations are in sheltered workshops, hospitals and similar institutions, homebound programs, and Department of Veterans Affairs sponsored homes. Compared to commercial employment, pay is lower for sheltered employment. Therefore, impaired persons usually do not look for sheltered employment if they can get other employment. The fact that an impaired person has accepted sheltered employment is not proof of that person's ability to engage in substantial gainful activity. Disability income. Disability income is the total amount you are paid under your employer's: 1) Accident or health plan for personal injuries or sickness, or 2) Pension plan (including annuities). Disability income is included in your income as wages or payments in lieu of wages for the time you are absent from work because of permanent and total disability. Any payment you receive from a plan that does not provide for disability retirement is not disability income. Any lump-sum payment for accrued annual leave that you receive when you retire on disability is a salary payment and is not disability income. For purposes of this credit, disability income does not include any amount you receive from your employer's pension plan after you reach mandatory retirement age. For more information on disability income, see Chapter 11. Physician's statement. If you are under 65, a doctor must certify that you are permanently and totally disabled. You must complete Part II of either Schedule R (Form 1040) or Schedule 3 (Form 1040A). However, the physician's statement does not have to be completed this year if: 1) Due to your continued disability you were unable to engage in any substantial gainful activity in 1992, and 2) You filed a physician's statement in an earlier year. This statement must have met one of these two conditions: ∙ If filed for tax year 1983 or an earlier tax year, it must have been for the same disability, or ∙ If filed for a tax year after 1983, the doctor must have signed on line B of the statement. If you have not filed a physician's statement in a previous year, or if the statement you filed did not meet one of these conditions, your doctor must complete the statement. Veterans. If the Department of Veterans Affairs (VA) certifies that you are permanently and totally disabled, you can file VA Form 21─0172, Certification of Permanent Total Disability, instead of the physician's statement. VA Form 21─0172 must be signed by a person authorized by the VA to do so. You can get VA Form 21─0172 from the VA. Married Taxpayers Generally, if you are married at the end of the tax year, you and your spouse must file a joint return to claim the credit. If you and your spouse did not live in the same household at any time during the tax year, you may file either joint or separate returns and still take the credit. If you are married, living with your child and apart from your spouse, you may be considered unmarried. See Head of Household in Chapter 2, for the tests you must meet. Figuring the Credit There are 2 ways to figure the credit: 1) You can figure the credit yourself (see the explanation which follows), or 2) The IRS will figure it for you. See Tax Figured by IRS in Chapter 31. Figuring the credit yourself. If you figure the credit yourself, you can use either Schedule R (Form 1040) or Schedule 3 (Form 1040A). You must: 1) Determine your base amount, and 2) Subtract from that base amount: ∙ Any nontaxable social security or equivalent railroad retirement benefits and other nontaxable pensions and disability benefits you received, and ∙ Part of your adjusted gross income, depending on the level of your income. The credit is 15% of the amount determined to be your base amount reduced by the items shown in (2). The steps to determine these amounts are explained in the following sections. In certain cases, the amount of your credit may be limited. See Limit on Credit, later. Base Amount To figure the credit, you must first determine your base amount. You will use this base amount in your calculations to figure your credit. If you are a qualified individual under age 65, your base amount cannot be more than your taxable disability income for the tax year. See Table 1, in chapter 34 of Pub 17 for Base Amounts for Schedule R or Schedule 3. Nontaxable Social Security and Railroad Retirement Benefits Once you have determined your base amount, you must then reduce it by the total amount of nontaxable social security and certain other nontaxable payments (covered later) you receive during the year. You figure the amount of the nontaxable payments on lines 13a through 13c of either Schedule R or Schedule 3. If you are married filing a joint return, you must reduce your base amount by the total amount of nontaxable payments both you and your spouse receive. Use the worksheet in the Form 1040 or Form 1040A instructions to determine if any part of your social security benefits (or equivalent railroad retirement benefits, if applicable) are taxable. The nontaxable portions are used to reduce your base amount. Subtract the total of the following payments from your base amount. ∙ Nontaxable social security payments. This includes the gross amount of nontaxable social security benefits (Form 1099-SSA), which includes disability benefits, any amounts that are withheld to pay premiums on supplementary Medicare insurance, and any reduction because of receipt of a benefit under workers' compensation. Do not include in the gross amount of nontaxable social security benefits a lump-sum death benefit payment you may receive as a surviving spouse, or a surviving child's insurance benefit payments you may receive as a guardian. If you are married filing a separate return and either you or your spouse or both of you live in a community property state, your social security benefits will be your separate property. ∙ Social security equivalent part of tier 1 railroad retirement pension payments that are not taxed (Form 1099-RRB). ∙ Nontaxable pension or annuity payments or disability benefits that are paid under a law administered by the Department of Veterans Affairs (VA). Do not include amounts received as a pension, annuity, or similar allowance for personal injuries or sickness resulting from active service in the armed forces of any country or in the Coast and Geodetic Survey or the Public Health Service, or as a disability annuity under Section 808 of the Foreign Service Act of 1980. ∙ Pension or annuity payments or disability benefits that are excluded from income under any provision of federal law other than the Internal Revenue Code. Amounts that are a return of your cost of a pension or annuity do not reduce your base amount. To avoid mistakes in figuring the credit that could result in additional tax to you later, it is important to correctly report all these nontaxable amounts. These amounts are verified by the IRS through information supplied by other government agencies. Community property. Married persons living apart and not filing a joint return may be able to disregard certain community property laws when figuring the credit. If either you or your spouse, or both of you, are domiciled in a community property state, see Spouses Living Apart in Publication 555, Federal Tax Information on Community Property, for more information. In applying the rules discussed in Publication 555, treat your retirement and disability pay, other than social security and the social security equivalent portion of railroad retirement benefits, as earned income. These social security and equivalent railroad retirement benefits are not community income. Adjusted Gross Income Limit You also have to subtract the amount of your "excess" adjusted gross income from the base amount used to figure your credit. Your excess adjusted gross income is one-half of the amount that your adjusted gross income is more than a set amount based on your filing status. You figure your excess adjusted gross income as follows. 1) Subtract from your adjusted gross income the amount shown for your filing status in the list below: ∙ $7,500 if you are single, a head of household, or a qualifying widow(er) with dependent child, ∙ $10,000 if you are married filing a joint return, or ∙ $5,000 if you are married filing a separate return and you and your spouse did not live in the same household at any time during the tax year. 2) Divide the result of (1) by 2. You figure your excess adjusted income on lines 14 through 17 of either Schedule R or Schedule 3. Income limits. You can use Table 2 in chapter 34 of Pub 17, Income Limits for Schedule R and Schedule 3, to see if you qualify for the credit. If your income for your age and filing status is less than the amounts shown in Table 2, you may be able to take the credit. If your income equals or exceeds either of the amounts in the table, shown in chapter 34 of Pub 17, you cannot take the credit. Note. If your base amount is limited to your taxable disability income, your credit will be figured on the lesser of the base amount or your taxable disability income. See Base Amount, earlier. In addition, you will not be able to claim the credit if the total of your nontaxable social security or other nontaxable pensions or disability benefits (line 13c of either Schedule R or Schedule 3) plus your excess adjusted gross income (line 17 of either Schedule R or Schedule 3) equals or is more than your base amount. Example. You are 66 years old and your spouse is 64. Your spouse is not disabled. You file a joint return on Form 1040. Your adjusted gross income is $14,630. Together you received $3,200 from social security, which was nontaxable. You figure the credit as follows: 1) Base amount .................................. $5,000 2) Subtract the total of: a) Social security and other nontaxable pensions ........... $3,200 b) Excess adjusted gross income 2,315 5,515 __________ __________ 3) Balance (Not less than 0) .................... 0 ========== 4) Credit ....................................... 0 ========== You may not take the credit since your nontaxable social security plus your excess adjusted gross income is more than your base amount. Limit on Credit Your credit may be limited if: 1) You file Schedule C, D, E, or F (Form 1040), and 2) The amount on Form 1040, line 23, is more than: $30,000 if single or head of household, $40,000 if married filing jointly or qualifying widow or widower, or $20,000 if married filing separately. For purposes of the above test, any tax-exempt interest from private activity bonds issued after August 7, 1986, and any net operating loss deduction must be added to the amount from Form 1040, line 23. If both of the above conditions do not apply, your credit is not subject to this limit. Then enter the amount from Schedule R, line 21, on Form 1040, line 42. If you meet both conditions, you must complete Form 6251, Alternative Minimum Tax - Individuals, through line 15 to determine your tentative minimum tax for purposes of the limit on this credit. The limit on your credit will be the smaller of: 1) Your credit as computed, or 2) Your regular tax minus: a) Any credit for child and dependent care expenses, and b) Any amount shown on line 15, Form 6251. If the smaller of (1) or (2) is (2), enter that amount on Schedule R, line 21, and on Form 1040, line 42. Also write "AMT" on the dotted line to the left of line 42, Form 1040. Credit Figured for You If you claim the credit, complete either Schedule R or Schedule 3, and attach it to your Form 1040 or Form 1040A when you file your return. There are separate instructions available for each schedule, which you should use to help you complete it. If you file Form 1040 and you want the IRS to figure your credit, see Form 1040 under Tax Figured by IRS in Chapter 31. If you file Form 1040A and you want the IRS to figure your credit, see Form 1040A under Tax Figured by IRS in Chapter 31. Examples The following examples illustrate the credit for the elderly or the disabled. Assume that none of the taxpayers in these examples had to file a Form 6251. The base amounts are taken from Table 1, Base Amounts for Schedule R or Schedule 3, shown earlier. Example 1. Jerry Ash is single and 68 years old. He received the following income for the year: Social security (nontaxable) .................. $3,120 Interest (taxable) ............................ 215 Pension (taxable part) ........................ 3,600 Wages from a part-time job .................... 4,245 Jerry's adjusted gross income is $8,060 (4,245 + 3,600 + 215). Jerry figures the credit as follows: 1) Base amount ............................... $5,000 2) Subtract the total of: a) Social security and other nontaxable pensions.......... $3,120 b) Excess adjusted gross income. 280 3,400 __________ __________ 3) Balance ................................... $1,600 ========== 4) Credit (15% of $1,600) $240 ========== Jerry's credit is $240. He files Schedule 3 (Form 1040A) and shows this amount on line 24b of Form 1040A. Example 2. James Davis is single, 58 years old, and files Form 1040. Two years ago he retired on permanent and total disability, and he is still permanently and totally disabled. He filed the required physician's statement with his return for the year he retired on disability, so this year he checks the box in Part II of Schedule R. He received the following income for the year: Social security (nontaxable) ................... $3,000 Interest (taxable) ............................. 100 Disability pension (taxable) ................... 8,400 James' adjusted gross income is $8,500 ($8,400 + 100). He figures the credit as follows: 1) Base amount ................................ $5,000 2) Taxable disability pension ................. $8,400 3) Smaller of (1) or (2) ...................... $5,000 4) Subtract the total of: a) Nontaxable disability benefits (social security) ............ $3,000 b) Excess adjusted gross income. 500 3,500 __________ __________ 5) Balance .................................... $1,500 ========== 6) Credit (15% of $1,500) ................. $225 ========== His credit is $225. He enters $225 on line 42 of Form 1040.