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Money Management (Distributed by the New Jersey Society of Certified Public Accountants)

Tax Breaks For People With Disabilities

People with disabilities are eligible for a number of tax breaks, reports the New Jersey Society of Certified Public Accountants (NJSCPA). These include tax deductions and credits that can offset some of the costs associated with managing a physical or mental disability. Additionally, certain income is tax free to qualified disabled individuals. If you or someone you know suffers from a disability, take the time to understand how the tax law may help to ease some financial burdens.

Tax-Free Income
Some payments made to taxpayers with disabilities are not taxable. These payments include amounts received under a workers' compensation act for a job-related illness or injury and veteran's disability benefits from the government. Other tax-free income includes damages awarded for physical injury or illness; benefits paid under a no-fault car insurance policy for loss of income or earning ability as a result of injuries; and compensation received for permanent loss of the use of some body part or function. Like regular Social Security payments, the taxation of Social Security disability payments is based on the recipient's income level.
Income received from an accident or health insurance plan for your disability may or may not be taxable depending on who paid for the plan. If your employer footed the bill, your benefits are taxable; if you paid the entire cost, you need not report as income any disability payments from the plan. If both you and your employer shared the cost, you report as income only the amount your employer paid for your disability. Your employer should be able to give you specific details.

Deductible Expenses
Medical expenses exceeding 7.5 percent of a taxpayer's adjusted gross income (AGI) are deductible. In addition to the costs of health insurance, physician fees, hospitals, and prescription drugs, the disabled person can deduct costs related to special equipment such as motorized wheelchairs, hand controls on a car, special telephone equipment, and the cost of a guide dog. Also deductible are expenses for special schools for a physically or mentally handicapped child and for schools that teach skills such as sign language, Braille, or lip reading.
Certain home improvements removing structural barriers to accommodate a disabled person may also be deducted as medical expenses. Such costs include entrance and exit ramps, widened doorways, lowered kitchen equipment and cabinets, and modifications to bathrooms. The full cost of such structural improvements, regardless of whether or not they increase the home's value, are added to other medical expenses and the total is deductible to the extent that it exceeds 7.5 percent of AGI. Capital expenditures for home improvement for medical care reasons are deductible only to the extent the cost of the improvement exceeds any increase in the property's value.
If you are disabled, you may be able to claim as an employee business expense (rather than as a medical expense subject to the 7.5 percent AGI floor) certain unreimbursed impairment-related work expenses necessary to satisfactorily perform your job, as long as they are not used, except incidentally, for personal purposes. For example, an employee confined to a wheelchair who needs someone to accompany him or her on business trips may deduct the person's travel costs.
Here's another important point: Although unreimbursed employee business expenses are generally deductible only to the extent that they, together with other miscellaneous expenses, exceed two percent of your AGI, this rule is waved for certain impairment-related work expenses.

Tax Credits
If you are under age 65 and retired on permanent and total disability, you may qualify for a tax credit. According to the IRS, 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 can be expected to result in death.
You qualify for the credit only if you have taxable disability income. The maximum credit, which could be as high as $1,125, is limited if your AGI or Social Security benefits are too high.
Qualified taxpayers who, in order to work or look for work, pay someone to care for a spouse or dependent who is physically or mentally unable of self-care, also may be eligible for a tax credit for a portion of the cost paid for such care.
Many of the rules governing these tax credits and other tax laws benefiting the disabled can be complex. A CPA can answer questions and help to ensure that you take full advantage of the tax breaks.

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Money Management is a weekly column on personal finance distributed by the NJSCPA.

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