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The Online Advisor - April 2000
Tax law gives disabled taxpayers some breaks
Congress has enacted a number of tax breaks to help ease the pain and suffering that individuals often endure when struggling with a disability. If you or a family member is handicapped or afflicted with a physical or mental disability, you should be aware of the following benefits.
Health care benefits. Reimbursements you receive from your employer's health plan to cover hospital stays, doctor visits, prescription medications, and other medical expenses are generally not subject to federal taxation.
Worker's compensation income. You do not have to pay income tax on payments you receive on account of a job-related illness or injury.
Social security disability benefits. If you have a physical or mental impairment that prevents you from working for at least one year, you could be eligible for social security disability benefits. These benefits are generally tax-free to lower-income recipients.
Supplemental social security benefits. If you are disabled, with limited income and few assets, you may be entitled to subsidized housing, food stamps, and free medical care from the government. You do not have to pay tax on any SSI benefits you receive.
Veteran's benefits. If you served in the armed forces and are a veteran receiving disability payments from the government, your payments are not subject to federal tax.
Retirement accounts. Most people who withdraw money from their qualified retirement plan before age 59-1/2 must pay a 10% penalty (in addition to regular income tax) on the amount withdrawn. If you are disabled, you do not have to pay the 10% penalty tax.
Tax credits. You may be eligible for a disability tax credit and a dependent care credit, depending on your circumstances. Small businesses can also claim a credit for amounts spent to improve access for the disabled.
Deductions. For disabled individuals, the usual medical deductions are expanded to include costs for special schools and modification of home and vehicles to make them accessible. A disabled person who works can deduct expenses that enable him to work, such as costs for a sign language interpreter or a seeing-eye dog. Blind individuals are also entitled to a higher standard deduction.