Schedule R: The Tax Credit for the Elderly or the Disabled - Tax Professionals Member Article By Dennis Jao
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Schedule R: The Tax Credit for the Elderly or the Disabled

Schedule R: The Tax Credit for the Elderly or the Disabled

Persons aged 65 and over and those who took early retirement due to disability are eligible for a federal tax credit which varies from $3,750 to $7,500. The senior citizen or disability credit reduces federal income tax for persons with disabilities, but different eligibility rules apply.


Who is eligible for the R Program?

Schedule R (Form 1040) can help you calculate the senior citizen or disability credit. To qualify, the taxpayer must be a U.S. citizen or resident alien who:

  • They are under 65 on the last day of the financial year. Still, retirees on permanent and total disability receive a taxable disability pension and have not yet reached the legal retirement age on 1 January of the new tax year.

  • You have reached the age of 65 before the last day of the financial year.

  • You retired for disability before the last day of the financial year, and you were permanently and completely disabled at the time of your retirement.

You are considered 65 one day before you officially clock 65, so you would be 65 on 31 December 2021 if you were born on 1 January 1956.


The Disability Requirement

Article 22, paragraph (e)(3) of the Tax Code provides that, in order to qualify as "permanent and total incapacity," you can no longer carry out a substantial remunerated activity. Your disability must be "medically determinable" and can be mental or physical. A qualified physician must attest that the condition has lasted or must persist for at least 12 months or could result in death.


Retiring on Disability

You are not required to officially retire. You may be considered a disabled pensioner if you were forced to stop working due to your disability.

Disability income must be paid under the employer's health or pension plan and must be included in income as wages or benefits in lieu of wages for the period of absence from work due to disability, permanent and total disability.

Any form of payment you receive from a plan that does not provide a disability pension is not disability income. For example, a one-time vacation payment you receive when you retire on disability is a salary payment, not disability income. Disability income does not include the amounts you receive when you reach the legal retirement age set by your employer, at which you should have retired even if you did not become disabled.

A sound tax professional will offer an interactive interview to walk you through the steps to determine if you qualify. Answer a few questions, and he will give you an answer. 


Income Limits

In addition to other qualifying factors, a taxpayer's adjusted gross income (AGI) must be less than or equal to the following amounts in the fiscal year 2021 (the return they will file in 2022).

If your filing status is...

Your adjusted gross income must be less than or equal to...

Single

$17,499

Head of household (HoH)

$17,499

Qualifying widow(er) with a dependent child

$17,499

Married filing jointly and only one spouse qualifies

$19,999

Married filing jointly and both spouses qualify

$24,999

Married filing separately and you lived apart from your spouse for the entire year

$12,499

 

How to calculate the credit

The tax credit is 15% of the starting amount, minus tax-free social security and certain other tax-free pensions, annuities, or disability benefits you received. You must also add half of the adjusted gross income (AGI) minus the AGI threshold. The equation would be:

  • Calculate your initial value.

  • Collect your non-taxable social security pensions and other non-taxable pensions.

  • Calculate the excessively adjusted gross income (AGI) and divide it by two.

  • Add step 2 to step 3.

  • Subtract the sum of the last step from the original value and multiply the result by 15%.

This formula results in a temporary tax credit. The provisional amount is then compared to the federal tax burden calculated using the "credit limit worksheet" contained in the instructions for Schedule R. The final tax credit is the lesser of the provisional amount or the tax liability limit amount.


The initial amount

The initial amount is the lesser of the taxable disability income or the following amounts set during the 2021 fiscal year: 

  

If your filing status is...

The initial amount is the smaller of taxable disability income or the following set amounts...

Single, qualifying widow(er) with dependent child, head of household (HoH), married filing jointly and only one spouse qualifies

$5,000

Married filing jointly and both spouses qualify

$7,500

Married filing separately and you lived apart from your spouse for the entire year

$3,750

 

Non-taxable social security benefits

The following sources of income are included in the measurement of the non-taxable portion of social security benefits:

  • Any other disability pension, annuity, or benefit excluded from income

  • Non-taxable social security payments before deduction of certain health insurance premiums and workers' compensation benefits.

  • Non-taxable Veterans Administration pensions, annuities, or disability, with some exceptions

  • Tax-free benefits from the Railway Pensions Authority are treated as social insurance.

The following types of income are not included in the assessment of the non-taxable portion of retirement benefits:

  • Amounts that are treated as a return based on the cost of the pension or annuity

  • Disability pension payable under Section 808 of the Foreign Service Act 1980

  • Any pension, annuity, or similar allowance for bodily injury or illness resulting from active service in the military of any country or in the National Oceanic and Atmospheric Administration or Public Health Service.


How to Apply for Credit

Applying for credit for the elderly or disabled requires filling out two additional income tax forms. Schedule R shows your calculations for how you got your credit score. Therefore, you must enter the total from this form on line 6d of Schedule 3.


Who is entitled to the senior tax credit?

You may be qualified for a senior citizen tax credit ("elderly or disabled person's credit") if you have reached a permanent and fulfilled age, are under the age of 65 on the last day of the financial year, but are retired for permanent and total disability, or have received taxable and non-taxable disability income, and have not yet reached the compulsory retirement age retirement on 1 January of the new tax year.


What is Schedule R Credit for Seniors or Persons with Disabilities?

Schedule R credit refers to a program offered by the IRS that allows certain elderly or disabled people to receive a credit between $3,750 and $7,500. The calculation for the credit factors in several figures, including adjusted gross income and non-taxable benefits such as Social Security.


Summary

  • Calculating your tax credit requires some simple steps using IRS Schedule R.

  • Taxpayers aged 65 and over, persons with a permanent and total disability, and taxpayers in certain similar situations are eligible.

  • The Seniors and Disability Credit provides a tax credit of $3,750 to $7,000 for those who can meet disability requirements or specific age.


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