How Does Being Disabled Affect Taxes?

Navigating the tax system can be complex, and for individuals with disabilities, understanding specific provisions is particularly important. Federal tax law includes various rules designed to recognize the unique financial situations that can arise due to a disability. These provisions often aim to provide financial relief or address specific costs associated with a disabling condition. The definition of “disability” for tax purposes may differ from medical or other definitions.

Understanding Disability for Tax Purposes and Income Taxability

The Internal Revenue Service (IRS) employs a specific definition for “permanently and totally disabled” to determine eligibility for tax benefits. An individual meets this definition if they cannot engage in any substantial gainful activity due to a physical or mental condition. A qualified physician must certify that this condition has lasted or is expected to last continuously for at least 12 months, or that it is expected to result in death. Substantial gainful activity refers to performing significant duties for pay or profit, distinct from self-care or hobbies.

The taxability of income received due to a disability varies depending on the source. Social Security Disability Insurance (SSDI) benefits may be subject to federal income tax. Whether these benefits are taxed depends on your “provisional income,” which is calculated as your adjusted gross income plus any tax-exempt interest and half of your Social Security benefits.

For single filers, if provisional income is between $25,000 and $34,000, up to 50% of SSDI benefits may be taxable. If provisional income exceeds $34,000, up to 85% of benefits can be taxed. For those married filing jointly, the thresholds are $32,000 and $44,000, respectively. If your provisional income falls below these lower thresholds, your Social Security benefits are generally not taxable.

Supplemental Security Income (SSI) payments are not considered taxable income. These benefits are needs-based and are not included in the calculation of taxable income. This distinction is important for individuals relying on SSI for financial support.

Workers’ compensation benefits received for an occupational sickness or injury are not taxable at the federal or state level. This includes both periodic payments and lump-sum settlements. However, an exception may arise if workers’ compensation payments reduce or offset Social Security Disability Insurance (SSDI) benefits, in which case a portion of the SSDI benefits that were offset might become taxable.

The tax treatment of private disability insurance benefits depends on how the premiums were paid. If an employee paid the premiums with after-tax dollars, the benefits received are not taxable. If the employer paid the premiums, or if the employee paid them with pre-tax dollars, the disability benefits received are taxable income. In situations where premiums are split between employer and employee, or involve both pre-tax and after-tax contributions, the taxability of benefits is prorated accordingly.

Key Tax Credits and Deductions

Individuals with disabilities may find several specific tax credits and deductions to reduce their tax liability. These provisions aim to alleviate some of the financial burdens associated with living with a disability.

One such provision is the Credit for the Elderly or the Disabled, a nonrefundable tax credit. To qualify, individuals must be age 65 or older by the end of the tax year, or retired on permanent and total disability and have received taxable disability income. Qualification requires a physician’s certification of permanent and total disability.

This credit is subject to specific income limitations based on adjusted gross income (AGI) and non-taxable Social Security or other non-taxable pension income. A single individual’s AGI must be below $17,500, and their non-taxable income below $5,000, to qualify. These thresholds vary for different filing statuses, such as married filing jointly, where higher combined income limits apply. The credit amount is calculated based on a starting amount, reduced by certain non-taxable benefits and a portion of the taxpayer’s AGI.

The medical expense deduction allows taxpayers to deduct qualified unreimbursed medical expenses. These expenses must exceed 7.5% of their adjusted gross income (AGI) to be deductible. This is an itemized deduction, requiring taxpayers to itemize rather than take the standard deduction.

For individuals with disabilities, this deduction can encompass:
Costs of special equipment like wheelchairs, crutches, or service animals.
Medically necessary home modifications, such as installing ramps, widening doorways, or modifying bathrooms to accommodate a disability. The deduction is limited to the amount by which the expense exceeds any increase in the home’s value.
Transportation costs for medical care, including mileage to and from appointments.

Beyond medical expenses, employed individuals with disabilities may deduct impairment-related work expenses (IRWE). These are specific unreimbursed costs incurred to enable them to work. Unlike the general medical expense deduction, IRWE are not subject to the 7.5% AGI threshold.

Examples of IRWE include:
Attendant care services at the workplace.
Reader services for visually impaired individuals.
Interpreter services for hearing-impaired individuals.
Adaptive equipment or specialized transportation necessary for work due to a disability.

These expenses must be necessary for satisfactory work performance and not for personal activities, except incidentally.

Tax Provisions for Dependents and Specialized Savings

Tax law provides benefits for family members supporting individuals with disabilities, helping alleviate caregiver financial burdens. Specialized savings accounts also offer a way to save for disability-related expenses.

A disabled individual can qualify as a dependent for tax purposes, allowing caregivers to claim dependent-related tax benefits. The age requirement for a “qualifying child” is waived if the child is permanently and totally disabled. This allows a disabled individual of any age to be a qualifying child, enabling claims for credits like the Child Tax Credit (if under 17) or the Credit for Other Dependents. The Earned Income Tax Credit (EITC) may also apply, with the age requirement lifted for a qualifying disabled child.

Taxpayers can also include medical expenses paid for a qualifying disabled dependent when calculating their own medical expense deduction. These expenses are combined with the taxpayer’s own medical costs before applying the adjusted gross income threshold.

The Child and Dependent Care Credit applies to expenses for a disabled dependent of any age who is physically or mentally unable to self-care and lives with the taxpayer for more than half the year. This credit helps those paying for care that enables them to work or look for work.

Achieving a Better Life Experience (ABLE) accounts offer a savings option for individuals with disabilities. These accounts allow saving for qualified disability expenses without jeopardizing eligibility for means-tested government benefits like Supplemental Security Income (SSI) or Medicaid. To be eligible, the disability must have occurred before the individual’s 26th birthday.

ABLE account contributions are not tax-deductible, but earnings grow tax-free, and qualified distributions are also tax-free. The annual contribution limit for ABLE accounts is tied to the annual gift tax exclusion, which is $19,000 for 2025. Additionally, employed ABLE account beneficiaries may be able to contribute an amount up to the federal poverty line for a one-person household, or their gross wages, if higher than the standard contribution limit.

Qualified disability expenses for ABLE account funds include:
Housing
Transportation
Education
Employment training
Healthcare
Assistive technology
Personal support services

The first $100,000 in an ABLE account is disregarded when determining eligibility for SSI, and funds do not affect Medicaid eligibility. Distributions used for non-qualified expenses are subject to income tax and may incur an additional penalty.