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Explaining an IRS Tax Credit for the Permanently and Totally Disabled

by Howard Hook, CFP®, CPA

As published in The Star-Ledger's business column, Biz Brain, January 8, 2012

Question:  I'm a disabled combat veteran rated by the VA as 100 percent totally and permanently disabled. Will the IRS accept this definition for a disability deduction? The IRS literature only talks about disability per Social Security's requirements. —JS

Answer: Thanks for your service, JS. The income deduction you are referring to is the Credit for The Elderly and Permanently and Totally Disabled, which is reported on Schedule R and attached to Form 1040, said Howard Hook, a certified financial planner and certified public accountant with EKS Associates in Princeton. Very few people will qualify.

To be eligible, IRC Section 22(e) (3) defines disability as: “An individual is permanently and totally disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. An individual shall not be considered to be permanently and totally disabled unless he furnishes proof of the existence thereof in such form and manner, and at such times, as the Secretary may require.”

That definition is the same used by the Social Security Administration in determining eligibility for SSI disability benefits, Hook said. “If the VA uses the same criteria in determining that you are 100 percent total and permanently disabled and you can furnish proof—you will need to keep a copy of the proof in your records and provide if asked—then you will have met the definition of disability,” he said.

Hook said you should keep the following in mind: If you are age 65 or older, you do not need to be disabled to be eligible as long you fall under certain taxable income criteria. If you are under age 65 and did not receive any taxable disability income, you're not eligible, regardless of whether you meet the definition of disabled. For single filers under age 65 who qualify as being permanently and totally disabled, the amount of the credit you'd receive depends on your taxable disability income, and any nontaxable pensions or Social Security payments you received. Finally, the credit is non-refundable, which means it can reduce your tax liability to zero, but you wouldn't get a refund. The shame of this credit is that it applies to very few taxpayers. Hook said those under 65 who are totally or permanently disabled must receive taxable disability benefits to qualify. If the taxable disability benefits are too high, the credit will be zero because their AGI will be too high.

But there may be a plus in your case, Hook said. You may be eligible for a full exemption of your New Jersey property taxes -- and that's worth more than the credit. The New Jersey Taxation web site said: “To qualify for a real estate tax exemption as a veteran, you must be honorably discharged from active wartime service in the US Armed Forces and be VA certified as having service-connected total or 100 percent permanent disability.”