If you are disabled, all income you receive is taxable unless the law specifically states that you can exclude it.
If you retired on disability, you must include in income any disability pension you receive under a plan that is paid for by your employer. You must report your taxable disability payments as wages until you reach minimum retirement age, which generally is the age at which you can first receive a pension or an annuity if you are not disabled. Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or an annuity. Even though disability pensions are generally taxable, certain military and government disability pensions are not. For example, disability benefits received from the Department of Veterans Affairs are not taxable. Other disability-related payments you may receive that are generally not taxable include benefits from a public welfare fund, workers' compensation act payments for an occupational sickness or injury, compensatory damages for physical injury or physical sickness, compensation for permanent loss or loss of use of a part or function of your body or for your permanent disfigurement, qualified long-term care insurance benefits and other accident and health insurance benefits.
Whether any part of your Social Security or tier 1 Railroad Retirement benefits is taxable generally depends on the amount of your income. To deteremine if any of your benefits are taxable, add one-half of your benefits to your total income including tax-exempt interest. If the total income calculation is equal to or greater than $25,000 ($32,000 if filing jointly) you may have to pay taxes on up to 85 percent of your benefits. Married taxpayers who live with their spouses and file separately have no base amount.
If you pay someone to work for you in your home and you control the work done and how it is done, you may be a household employer. If you are a household employer, you may need to pay employment taxes such as Social Security tax, Medicare tax, and federal unemployment tax.
As a disabled person, you may qualify for certain deductions and credits that may reduce your taxes. If you itemize your deductions on Schedule A, Itemized Deductions, you can deduct the part of your medical expenses that is more than 7.5% of your adjusted gross income. Medical expenses may include expenses for the following items:
- Long-term care insurance premiums
- Special school or home for the disabled
- Artificial limbs
- Hearing aids
- Cost and repair of special telephone equipment for the hearing impaired
- Cost of equipment that displays the audio part of television programs as subtitles for the hearing impaired
- Cost and care of a guide dog or other animal aiding the physically disabled
- Cost and maintenance of a wheelchair or autoette
- Improvements made to a home that do not increase its value if the main purpose is medical care (for example: constructing entrance or exit ramps for your home and widening doorways or hallways, installing handrails or support bars in rooms, lowering kitchen cabinets, moving electrical outlets and fixtures, installing porch lifts but generally not elevators, modifying fire alarms, smoke detectors, and other warning systems, and modifying stairways)
Other expenses that you may be able to deduct as itemized deductions are impairment-related work expenses. These are allowable business expenses for attendant care at work and other expenses at work that are needed for you to work. You should keep receipts to substantiate expenses associated with taking any deductions.
If you are retired on permanent and total disability, you may be able to claim the Credit for the Elderly or the Disabled. Also, benefits you receive under your employer's disability retirement plan are considered earned income for purposes of calculating the Earned Income Credit (EIC).