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Publication 907
Tax Highlights for Persons with Disabilities

For use in preparing 2002 Returns

Introduction

This publication gives you a brief introduction to certain parts of the tax law of particular interest to people with disabilities and those who care for people with disabilities. It includes highlights about:

  • Income,
  • Itemized deductions,
  • Tax credits,
  • Household employees, and
  • Business tax incentives.

You will find most of the information you need to complete your tax return in your form instruction booklet. If you need additional information, you may want to order a free tax publication. You may also want to take advantage of the other free tax help services that IRS provides.

See How To Get Tax Help, at the end of this publication, for information about getting publications, forms, and free tax services.

Comments and suggestions.   We welcome your comments about this publication and your suggestions for future editions.

You can e-mail us while visiting our web site at www.irs.gov.

You can write to us at the following address:


Internal Revenue Service
Tax Forms and Publications
W:CAR:MP:FP
1111 Constitution Ave. NW
Washington, DC 20224

We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.

Income

All income is taxable unless it is specifically excluded by law. The following discussions highlight some income items (both taxable and nontaxable) that are of particular interest to people with disabilities and those who care for people with disabilities.

Dependent Care Benefits

You can exclude from income benefits provided under your employer's qualified dependent care assistance plan. You may be able to exclude up to $5,000. The care must be provided for your dependent under the age of 13 or your spouse or dependent who is not able to care for himself or herself.

For information about excluding benefits on Form 1040, get Form 2441, Child and Dependent Care Expenses, and its instructions. For information about excluding benefits on Form 1040A, get Schedule 2 (Form 1040A), Child and Dependent Care Expenses for Form 1040A Filers.

Social Security and Equivalent Tier 1 Railroad Retirement Benefits

If you received social security or equivalent tier 1 railroad retirement benefits during the year, part of the amount you received may be taxable.

Are any of your benefits taxable?   If the only income you received during the year was your social security or equivalent tier 1 railroad retirement benefits, your benefits generally are not taxable and you probably do not have to file a return.

If you received income during the year in addition to social security or equivalent tier 1 railroad retirement benefits, part of your benefits may be taxable if all of your other income, including tax-exempt interest, plus half of your benefits are more than:

  • $25,000 if you are single, head of household, or qualifying widow(er),
  • $25,000 if you are married filing separately and lived apart from your spouse for all of the year,
  • $32,000 if you are married filing jointly, or
  • $-0- if you are married filing separately and lived with your spouse at any time during the year.

For more information, see the instructions for lines 20a and 20b (Form 1040) or lines 14a and 14b (Form 1040A). Publication 915, Social Security and Equivalent Railroad Retirement Benefits, contains more detailed information.

Supplemental security income (SSI) payments.   Social security benefits do not include SSI payments, which are not taxable. Do not include these payments in your income.

Disability Pensions

Generally, you must report as income any amount you receive for your disability through an accident or health insurance plan that is paid for by your employer. If both you and your employer pay for the plan, report as income only the amount you receive for your disability that is due to your employer's payments. Your employer should be able to give you specific details about your pension plan and tell you the amount you paid for your disability pension.

If you paid the entire cost of the plan, do not report as income any amounts you get from the plan for your disability. See Publication 525, Taxable and Nontaxable Income, for more information.

Military and Government Disability Pensions

Generally, you must report disability pensions as income, but do not include certain military and government disability pensions. For information about military and government disability pensions, see Publication 525.

VA disability benefits.   Do not include disability benefits you receive from the Department of Veterans Affairs (VA) in your gross income. If you are a military retiree and do not receive your disability benefits from the VA, do not include in your income the amount of disability benefits equal to the VA benefits to which you are entitled.

Do not include in your income any veterans' benefits paid under any law, regulation, or administrative practice administered by the VA. These include:

  • Education, training, or subsistence allowances,
  • Disability compensation and pension payments for disabilities paid either to veterans or their families,
  • Grants for homes designed for wheelchair living,
  • Grants for motor vehicles for veterans who lost their sight or the use of their limbs,
  • Veterans' insurance proceeds and dividends paid either to veterans or their beneficiaries, including the proceeds of a veteran's endowment policy paid before death, or
  • Interest on insurance dividends left on deposit with the VA.

Rehabilitative program payments.   VA payments to hospital patients and resident veterans for their services under the VA's therapeutic or rehabilitative programs are included as income other than wages. These payments are reported on line 21 of Form 1040.

Other Payments

You may receive other payments that are related to your disability. The following payments are not taxable.

  • Benefit payments from a public welfare fund, such as payments due to blindness.
  • Workers' compensation for an occupational sickness or injury if paid under a workers' compensation act or similar law.
  • Compensatory (but not punitive) damages, for physical injury or physical sickness.
  • Disability benefits under a no-fault car insurance policy for loss of income or earning capacity as a result of injuries.
  • Compensation for permanent loss or loss of use of a part or function of your body, or for your permanent disfigurement.

Long-Term Care Insurance

Qualified long-term care insurance contracts are generally treated as accident and health insurance contracts. Amounts you receive from them (other than policyholder dividends or a premium refund) generally are excludable from income as amounts received for personal injury or sickness. More detailed information can be found in Publication 525.

Accelerated Death Benefits

You can exclude from income accelerated death benefits you receive on the life of an insured individual if certain requirements are met. Accelerated death benefits are amounts received under a life insurance contract before the death of the insured. These benefits also include amounts received on the sale or assignment of the contract to a viatical settlement provider. This exclusion applies only if the insured was a terminally ill individual or a chronically ill individual. For more information, see Publication 525.

Itemized Deductions

If you file Form 1040, you generally can either claim the standard deduction or itemize your deductions. You must use Schedule A (Form 1040) to itemize your deductions. See your form instructions for information on the standard deduction and the deductions you can itemize. The following discussions highlight some itemized deductions that are of particular interest to persons with disabilities.

Medical Expenses

You can deduct medical and dental expenses for you, your spouse, and your dependents.

Medical expenses include payments you make for the diagnosis, cure, mitigation, treatment, or prevention of disease and for treatment affecting any part or function of the body. They also include the cost of transportation for needed medical care and payments for medical insurance.

You can deduct only the part of your medical and dental expenses that is more than 7.5% of your adjusted gross income shown on line 36, Form 1040.

The following list contains only highlights. For more detailed information, get Publication 502, Medical and Dental Expenses.

Special Items and Equipment

Your medical expenses can include payments for any of the following items.

  • Artificial limbs, eyeglasses, and hearing aids.
  • The part of the cost of Braille books and magazines that is more than the price of regular printed editions.
  • Cost and repair of special telephone equipment for hearing-impaired persons.
  • Cost of equipment that displays the audio part of television programs as subtitles for hearing-impaired persons.
  • Cost and maintenance of a wheelchair or autoette.
  • Cost and care of a guide dog or other animal aiding a person with a disability.
  • A therapist or other person who gives patterning exercises to a mentally retarded child.
  • A special school, if the main reason for using the school is its resources for relieving a mental or physical disability. This includes the cost of teaching and the cost of remedial language training to correct a condition caused by a birth defect.
  • Premiums for qualified long-term care insurance, up to certain amounts.
  • Improvements to your home that do not increase its value if the main purpose is medical care. An example is constructing entrance or exit ramps to your home.

TAXTIP: Improvements to your home that do increase its value, if the main purpose is medical care, may be partly included as a medical expense. See Publication 502 for more information.

Impairment-Related Work Expenses

If you are an employee and have a physical or mental disability that functionally limits your employment, or a physical or mental impairment that substantially limits one or more of your major life activities, you may be able to claim impairment-related work expenses. These are your allowable business expenses for attendant care at your workplace and other expenses in connection with your workplace that are necessary for you to work.

If you have impairment-related work expenses, complete Form 2106, Employee Business Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses, and attach it to your Form 1040.

TAXTIP: Generally, employee business expenses are subject to a 2%-of-adjusted-gross-income limit. However, impairment-related work expenses are not subject to the 2% limit.

Tax Credits

This discussion highlights three tax credits that may be of interest to people with disabilities and those who care for people with disabilities.

Child and Dependent Care Credit

Generally, if you pay someone to care for either your dependent under age 13 or your spouse or dependent who is not able to care for himself or herself, you may be able to get a credit of up to 30% of your expenses. To qualify, you must pay these expenses so you can work or look for work.

You can claim the credit on Form 1040 or 1040A. You figure the credit on Form 2441 (Form 1040) or Schedule 2 (Form 1040A).

For more information, see the instructions for line 46 (Form 1040) or line 29 (Form 1040A). Publication 503, Child and Dependent Care Expenses, contains more detailed information.

Credit for the Elderly
or the Disabled

You may be able to claim this credit if you are 65 or older or if you are under 65 and you retired on permanent and total disability.

You can claim the credit on Form 1040 or 1040A. You figure the credit on Schedule R (Form 1040) or on Schedule 3 (Form 1040A).

For more information, see the instructions for line 47 (Form 1040) or line 30 (Form 1040A). Publication 524, Credit for the Elderly or the Disabled, contains more detailed information.

Earned Income Credit

This credit is based on the amount of your earned income. But you can get the credit only if your earned income for 2002 was less than:

  • $11,060 ($12,060 for married filing jointly) and you did not have a qualifying child,
  • $29,201 ($30,201 for married filing jointly) and you had one qualifying child, or
  • $33,178 ($34,178 for married filing jointly) and you had more than one qualifying child.

To figure the credit, use the worksheet in the instructions for Form 1040, 1040A, or 1040EZ. If you have a qualifying child, also complete Schedule EIC, Earned Income Credit, and attach it to your Form 1040 or 1040A. You cannot use Form 1040EZ if you have a qualifying child.

Qualifying child.   A qualifying child must be under age 19 at the end of 2002, or a full-time student under age 24 at the end of 2002, or permanently and totally disabled at any time during 2002, regardless of age.

Earned income.   If you are retired on disability, benefits you receive under your employer's disability retirement plan are considered earned income until you reach minimum retirement age. However, payments you received from a disability insurance policy that you paid the premiums for are not earned income.

More information.   For more information, including all the requirements to claim the credit, see the instructions for line 64 (Form 1040), line 41 (Form 1040A), or line 8 (Form 1040EZ). Publication 596, Earned Income Credit (EIC), contains more detailed information.

Household Employers

Generally, if you pay someone to work in your home, such as a baby sitter or housekeeper, you may be a household employer who has to pay employment taxes.

A person you hire through an agency is not your employee if the agency controls what work is done, and how it is done. This control could include setting the fee, requiring regular reports, and providing rules of conduct and appearance. In this case you do not have to pay employment taxes on the amount you pay. But if you control what work is done and how it is done, the worker is your employee. If a worker is your employee, it does not matter that you hired the worker through an agency or from a list provided by an agency.

To find out if you have to pay employment taxes, see Publication 926, Household Employer's Tax Guide.

Business Tax Incentives

If you own or operate a business, or you are looking for work, you should be aware of three tax incentives for businesses to help persons with disabilities. They are:

  • Deduction for costs of removing barriers to the disabled and the elderly - This is a deduction a business can take for making a facility or public transportation vehicle more accessible to and usable by persons who are disabled or elderly. See chapter 8 in Publication 535, Business Expenses.
  • Disabled access credit - This is a tax credit for an eligible small business that pays or incurs expenses to provide access to persons with disabilities. The expenses must be to enable the eligible small business to comply with the Americans with Disabilities Act of 1990. See the instructions for Form 8826, Disabled Access Credit, for more information.
  • Work opportunity credit - This is a tax credit for businesses that hire individuals from certain targeted groups. One targeted group consists of vocational rehabilitation referrals. These are individuals who have a physical or mental disability that results in a substantial handicap to employment. See the instructions for Form 5884, Work Opportunity Credit, for more information.

How To Get Tax Help

You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get more information from the IRS in several ways. By selecting the method that is best for you, you will have quick and easy access to tax help.

Contacting your Taxpayer Advocate.   If you have attempted to deal with an IRS problem unsuccessfully, you should contact your Taxpayer Advocate.

The Taxpayer Advocate represents your interests and concerns within the IRS by protecting your rights and resolving problems that have not been fixed through normal channels. While Taxpayer Advocates cannot change the tax law or make a technical tax decision, they can clear up problems that resulted from previous contacts and ensure that your case is given a complete and impartial review.

To contact your Taxpayer Advocate:

  • Call the Taxpayer Advocate at
    1-877-777-4778.
  • Call, write, or fax the Taxpayer Advocate office in your area.
  • Call 1-800-829-4059 if you are a
    TTY/TDD user.

For more information, see Publication 1546, The Taxpayer Advocate Service of the IRS.

Free tax services.   To find out what services are available, get Publication 910, Guide to Free Tax Services. It contains a list of free tax publications and an index of tax topics. It also describes other free tax information services, including tax education and assistance programs and a list of TeleTax topics.

COMPUTE: Personal computer. With your personal computer and modem, you can access the IRS on the Internet at www.irs.gov. While visiting our web site, you can:

  • See answers to frequently asked tax questions or request help by e-mail.
  • Download forms and publications or search for forms and publications by topic or keyword.
  • Order IRS products on-line.
  • View forms that may be filled in electronically, print the completed form, and then save the form for recordkeeping.
  • View Internal Revenue Bulletins published in the last few years.
  • Search regulations and the Internal Revenue Code.
  • Receive our electronic newsletters on hot tax issues and news.
  • Learn about the benefits of filing electronically (IRS e-file).
  • Get information on starting and operating a small business.

You can also reach us with your computer using File Transfer Protocol at ftp.irs.gov.

FAX: TaxFax Service. Using the phone attached to your fax machine, you can receive forms and instructions by calling 703-368-9694. Follow the directions from the prompts. When you order forms, enter the catalog number for the form you need. The items you request will be faxed to you.

For help with transmission problems, call the FedWorld Help Desk at 703-487-4608.

PHONE: Phone. Many services are available by phone.
 

  • Ordering forms, instructions, and publications. Call 1-800-829-3676 to order current and prior year forms, instructions, and publications.
  • Asking tax questions. Call the IRS with your tax questions at 1-800-829-1040.
  • Solving problems. Take advantage of Everyday Tax Solutions service by calling your local IRS office to set up an in-person appointment at your convenience. Check your local directory assistance or www.irs.gov for the numbers.
  • TTY/TDD equipment. If you have access to TTY/TDD equipment, call 1-800-829- 4059 to ask tax questions or to order forms and publications.
  • TeleTax topics. Call 1-800-829-4477 to listen to pre-recorded messages covering various tax topics.


Evaluating the quality of our telephone services. To ensure that IRS representatives give accurate, courteous, and professional answers, we use several methods to evaluate the quality of our telephone services. One method is for a second IRS representative to sometimes listen in on or record telephone calls. Another is to ask some callers to complete a short survey at the end of the call.

WALKIN: Walk-in. Many products and services are available on a walk-in basis.
 

  • Products. You can walk in to many post offices, libraries, and IRS offices to pick up certain forms, instructions, and publications. Some IRS offices, libraries, grocery stores, copy centers, city and county governments, credit unions, and office supply stores have an extensive collection of products available to print from a CD-ROM or photocopy from reproducible proofs. Also, some IRS offices and libraries have the Internal Revenue Code, regulations, Internal Revenue Bulletins, and Cumulative Bulletins available for research purposes.
  • Services. You can walk in to your local IRS office to ask tax questions or get help with a tax problem. Now you can set up an appointment by calling your local IRS office number and, at the prompt, leaving a message requesting Everyday Tax Solutions help. A representative will call you back within 2 business days to schedule an in-person appointment at your convenience.

ENVELOPE: Mail. You can send your order for forms, instructions, and publications to the Distribution Center nearest to you and receive a response within 10 workdays after your request is received. Find the address that applies to your part of the country.

  • Western part of U.S.:
    Western Area Distribution Center
    Rancho Cordova, CA 95743-0001
  • Central part of U.S.:
    Central Area Distribution Center
    P.O. Box 8903
    Bloomington, IL 61702-8903
  • Eastern part of U.S. and foreign addresses:
    Eastern Area Distribution Center
    P.O. Box 85074
    Richmond, VA 23261-5074

CDROM: CD-ROM for tax products. You can order IRS Publication 1796, Federal Tax Products on CD-ROM, and obtain:

  • Current tax forms, instructions, and publications.
  • Prior-year tax forms and instructions.
  • Popular tax forms that may be filled in electronically, printed out for submission, and saved for recordkeeping.
  • Internal Revenue Bulletins.

The CD-ROM can be purchased from National Technical Information Service (NTIS) by calling 1-877-233-6767 or on the Internet at http://www.irs.gov/cdorders. The first release is available in early January and the final release is available in late February.

CDROM: CD-ROM for small businesses. IRS Publication 3207, Small Business Resource Guide, is a must for every small business owner or any taxpayer about to start a business. This handy, interactive CD contains all the business tax forms, instructions and publications needed to successfully manage a business. In addition, the CD provides an abundance of other helpful information, such as how to prepare a business plan, finding financing for your business, and much more. The design of the CD makes finding information easy and quick and incorporates file formats and browsers that can be run on virtually any desktop or laptop computer.

It is available in March. You can get a free copy by calling 1-800-829-3676 or by visiting the website at www.irs.gov/smallbiz.