33.   Credit for the Elderly or the Disabled

Table of Contents

    * Introduction
    * Useful Items - You may want to see:
    * Can You Take the Credit?
          o Qualified Individual
          o Income Limits
    * Figuring the Credit
          o Step 1. Determine Initial Amount
          o Step 2. Total Certain Nontaxable Pensions and Benefits
          o Step 3. Determine Excess Adjusted Gross Income
          o Step 4. Determine Your Credit
          o Credit Figured for You
          o Example

Introduction

If you qualify, the law provides a number of credits that can reduce the
tax you owe for a year. One of these credits is the credit for the elderly
or the disabled.

This chapter explains:

    *

      Who qualifies for the credit for the elderly or the disabled, and
    *

      How to figure this credit.

You may be able to take this credit if you are:

    *

      Age 65 or older, or
    *

      Retired on permanent and total disability.

Useful Items - You may want to see:

Publication

    *

      524 Credit for the Elderly or the Disabled
    *

      554 Older Americans' Tax Guide
    *

      967 The IRS Will Figure Your Tax

Forms (and Instructions)

    *

      Schedule 3 (Form 1040A)
      Credit for the Elderly or the Disabled for Form 1040A Filers
    *

      Schedule R (Form 1040)
      Credit for the Elderly or the Disabled

Can You Take the Credit?

You can take the credit for the elderly or the disabled if you meet both of
the following requirements.

    *

      You are a qualified individual.
    *

      Your income is not more than certain limits.

You can use Figure 33-A and Figure 33-B as guides to see if you qualify.

Use Figure 33-A first to see if you are a qualified individual. If you are,
go to Figure 33-B to make sure your income is not too high to take the credit.

Tip
You can take the credit only if you file Form 1040 or Form 1040A. You
cannot take the credit if you file Form 1040EZ.
Qualified Individual

You are a qualified individual for this credit if you are a U.S. citizen or
resident and either of the following applies.

   1.

      You were age 65 or older at the end of 2005.
   2.

      You were under age 65 at the end of 2005 and all three of the
following statements are true.
         1.

            You retired on permanent and total disability (explained later).
         2.

            You received taxable disability income for 2005.
         3.

            On January 1, 2005, you had not reached mandatory retirement
age (defined later under Disability income).

Age 65.   You are considered to be age 65 on the day before your 65th
birthday. Therefore, if you were born on January 1, 1941, you are
considered to be age 65 at the end of 2005.

U.S. Citizen or Resident

You must be a U.S. citizen or resident (or be treated as a resident) to
take the credit. Generally, you cannot take the credit if you were a
nonresident alien at any time during the tax year.
Exceptions.   You may be able to take the credit if you are a nonresident
alien who is married to a U.S. citizen or resident at the end of the tax
year and you and your spouse choose to treat you as a U.S. resident. If you
make that choice, both you and your spouse are taxed on your worldwide income.

If you were a nonresident alien at the beginning of the year and a resident
at the end of the year, and you were married to a U.S. citizen or resident
at the end of the year, you may be able to choose to be treated as a U.S.
resident for the entire year. In that case, you may be allowed to take the
credit. For information on these choices, see chapter 1 of Publication 519,
U.S. Tax Guide for Aliens.
Married Persons

Generally, if you are married at the end of the tax year, you and your
spouse must file a joint return to take the credit. However, if you and
your spouse did not live in the same household at any time during the tax
year, you can file either joint or separate returns and still take the credit.
Head of household.   You can file as head of household and qualify to take
the credit even if your spouse lived with you during the first 6 months of
the year, if you meet all the tests. See Head of Household in chapter 2 for
the tests you must meet.

Under Age 65

If you are under age 65 at the end of 2005, you can qualify for the credit
only if you are retired on permanent and total disability. You are retired
on permanent and total disability if:

    *

      You were permanently and totally disabled when you retired, and
    *

      You retired on disability before the close of the tax year.

Even if you do not retire formally, you are considered retired on
disability when you have stopped working because of your disability.

If you retired on disability before 1977, and were not permanently and
totally disabled at the time, you can qualify for the credit if you were
permanently and totally disabled on January 1, 1976, or January 1, 1977.

Tip
You are considered to be under age 65 at the end of 2005 if you were born
after January 1, 1941.
Permanent and total disability.    You are permanently and totally disabled
if you cannot engage in any substantial gainful activity because of your
physical or mental condition. A physician must certify that the condition
has lasted or can be expected to last continuously for 12 months or more,
or that the condition can be expected to result in death. See Physician's
statement, later.

Substantial gainful activity.   Substantial gainful activity is the
performance of significant duties over a reasonable period of time while
working for pay or profit, or in work generally done for pay or profit.
Full-time work (or part-time work done at your employer's convenience) in a
competitive work situation for at least the minimum wage conclusively shows
that you are able to engage in substantial gainful activity.

  Substantial gainful activity is not work you do to take care of yourself
or your home. It is not unpaid work on hobbies, institutional therapy or
training, school attendance, clubs, social programs, and similar
activities. However, doing this kind of work may show that you are able to
engage in substantial gainful activity.

   The fact that you have not worked for some time is not, of itself,
conclusive evidence that you cannot engage in substantial gainful activity.

Sheltered employment.   Certain work offered at qualified locations to
physically or mentally impaired persons is considered sheltered employment.
These qualified locations are in sheltered workshops, hospitals and similar
institutions, homebound programs, and Department of Veterans Affairs (VA)
sponsored homes.

  Compared to commercial employment, pay is lower for sheltered employment.
Therefore, one usually does not look for sheltered employment if he or she
can get other employment. The fact that one has accepted sheltered
employment is not proof of that person's ability to engage in substantial
gainful activity.

Physician's statement.   If you are under age 65, you must have your
physician complete a statement certifying that you were permanently and
totally disabled on the date you retired. You can use the statement in the
instructions for Schedule R (Form 1040) or Schedule 3 (Form 1040A).

  
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Figure 33-A Are You a Qualified Individual? Figure 33-B Income Limits

  You do not have to file this statement with your Form 1040 or Form 1040A,
but you must keep it for your records.

Veterans.   If the Department of Veterans Affairs (VA) certifies that you
are permanently and totally disabled, you can substitute VA Form 21-0172,
Certification of Permanent and Total Disability, for the physician's
statement you are required to keep. VA Form 21-0172 must be signed by a
person authorized by the VA to do so. You can get this form from your local
VA regional office.

Physician's statement obtained in earlier year.   If you got a physician's
statement in an earlier year and, due to your continued disabled condition,
you were unable to engage in any substantial gainful activity during 2005,
you may not need to get another physician's statement for 2005. For a
detailed explanation of the conditions you must meet, see the instructions
for Part II of Schedule R (Form 1040) or Schedule 3 (Form 1040A). If you
meet the required conditions, check the box on line 2 of Part II of
Schedule R (Form 1040) or Schedule 3 (Form 1040A).

  If you checked box 4, 5, or 6 in Part I of either Schedule R or Schedule
3, enter in the space above the box on line 2 in Part II the first name(s)
of the spouse(s) for whom the box is checked.

Disability income.   If you are under age 65, you can qualify for the
credit only if you have taxable disability income. Disability income must
meet both of the following requirements.

    *

      It must be paid under your employer's accident or health plan or
pension plan.
    *

      It must be included in your income as wages (or payments instead of
wages) for the time you are absent from work because of permanent and total
disability.

Payments that are not disability income.   Any payment you receive from a
plan that does not provide for disability retirement is not disability
income. Any lump-sum payment for accrued annual leave that you receive when
you retire on disability is a salary payment and is not disability income.

  For purposes of the credit for the elderly or the disabled, disability
income does not include amounts you receive after you reach mandatory
retirement age. Mandatory retirement age is the age set by your employer at
which you would have had to retire, had you not become disabled.

Income Limits

To determine if you can claim the credit, you must consider two income
limits. The first limit is the amount of your adjusted gross income (AGI).
The second limit is the amount of nontaxable social security and other
nontaxable pensions you received. The limits are shown in Figure 33-B, later.

If both your AGI and nontaxable pensions are less than the income limits,
you may be able to claim the credit. See Figuring the Credit, next.

Caution
If either your AGI or your nontaxable pensions are equal to or more than
the income limits, you cannot take the credit.
Figuring the Credit

You can figure the credit yourself (see the explanation that follows) or
the IRS will figure it for you. See Credit Figured for You, later.
Figuring the credit yourself.   If you figure the credit yourself, fill out
the front of either Schedule R (if you are filing Form 1040) or Schedule 3
(if you are filing Form 1040A). Next, fill out Part III of either Schedule
R or Schedule 3.

Table 33-1. Initial Amounts
  	IF your filing status is ... 	  	THEN enter on line 10 of Schedule R
(Form 1040) or Schedule 3 (Form 1040A)...
  	Single, head of household, or qualifying widow(er) with dependent child
and, by the end of 2005, you were 	  	 
  	  	• 65 or older 	$5,000
  	  	• under 65 and retired on permanent and total disability 1 	$5,000
  	Married filing a joint return and by the end of 2005 	  	 
  	  	• both of you were 65 or older 	$7,500
  	  	• both of you were under 65 and one of you retired on permanent and
total disability 1 	$5,000
  	  	• both of you were under 65 and both of you retired on permanent and
total disability 2 	$7,500
  	  	• one of you was 65 or older, and the other was under 65 and retired
on permanent and total disability 3 	$7,500
  	  	• one of you was 65 or older, and the other was under 65 and not
retired on permanent and total disability 	$5,000
  	Married filing a separate return and you did not live with your spouse
at any time during the year and, by the end of 2005, you were 	  	 
  	  	• 65 or older 	$3,750
  	  	• under 65 and retired on permanent and total disability 1 	$3,750
1Amount cannot be more than the taxable disability income. 	 
2Amount cannot be more than your combined taxable disability income. 	 
3Amount is $5,000 plus the taxable disability income of the spouse under
age 65, but not more than $7,500. 	 
  
Worksheet you may need to fill in



There are four steps in Part III to determine the amount of your credit:

   1.

      Determine your initial amount (lines 10-12).
   2.

      Total any nontaxable social security and certain other nontaxable
pensions and disability benefits you received (lines 13a, 13b, and 13c).
   3.

      Determine your excess adjusted gross income (lines 14-17).
   4.

      Determine your credit (lines 18-24 of Schedule R or lines 18-22 of
Schedule 3).

These steps are discussed in more detail next.

Step 1. Determine Initial Amount

To figure the credit, you must first determine your initial amount. See
Table 33-1.
Initial amounts for persons under age 65.   If you are a qualified
individual under age 65, your initial amount cannot be more than your
taxable disability income.

Step 2. Total Certain Nontaxable Pensions and Benefits

Step 2 is to figure the total amount of nontaxable social security and
certain other nontaxable payments you received during the year. (See
Nontaxable payments, later.)

Enter these nontaxable payments on lines 13a or 13b, and total them on line
13c. If you are married filing a joint return, you must enter the combined
amount of nontaxable payments both you and your spouse receive.

Tip
Worksheets are provided in the Form 1040 and Form 1040A instructions to
help you determine if any part of your social security benefits (or
equivalent railroad retirement benefits) is taxable.
Nontaxable payments.   Include the following nontaxable payments in the
amounts you enter on lines 13a and 13b.

    *

      Nontaxable social security payments. This is the nontaxable part of
the amount of benefits shown in box 5 of Form SSA-1099, which includes
disability benefits, before deducting any amounts withheld to pay
      premiums on supplementary Medicare insurance, and before any
reduction because of receipt of a benefit under workers' compensation.

      Do not include a lump-sum death benefit payment you may receive as a
surviving spouse, or a surviving child's insurance benefit payments you may
receive as a guardian.
    *

      Social security equivalent part of tier 1 railroad retirement pension
payments that is not taxed. This is the nontaxable part of the amount of
benefits shown in box 5 of Form RRB-1099.
    *

      Nontaxable pension or annuity payments or disability benefits that
are paid under a law administered by the Department of Veterans Affairs (VA).

      Do not include amounts received as a pension, annuity, or similar
allowance for personal injuries or sickness resulting from active service
in the armed forces of any country or in the National Oceanic and
Atmospheric Administration, or the Public Health Service, or as a
disability annuity under section 808 of the Foreign Service Act of 1980.
    *

      Pension or annuity payments or disability benefits that are excluded
from income under any provision of federal law other than the Internal
Revenue Code.

      Do not include amounts that are a return of your cost of a pension or
annuity. These amounts do not reduce your initial amount.

Caution
You should be sure to take into account all of the nontaxable amounts you
receive. These amounts are verified by the IRS through information supplied
by other government agencies.
Step 3. Determine Excess Adjusted Gross Income

You also must reduce your initial amount by your excess adjusted gross
income. Figure your excess adjusted gross income on lines 14-17.

You figure your excess adjusted gross income as follows:

   1.

      Subtract from your adjusted gross income (Form 1040, line 38 or Form
1040A, line 22) the amount shown for your filing status in the following list:
         1.

            $7,500 if you are single, a head of household, or a qualifying
widow(er) with a dependent child,
         2.

            $10,000 if you are married filing a joint return, or
         3.

            $5,000 if you are married filing a separate return and you and
your spouse did not live in the same household at any time during the tax year.
   2.

      Divide the result of (1) by 2.

Step 4. Determine Your Credit

To determine if you can take the credit, you must add the amounts you
figured in Step 2 and Step 3.

IF the total of Steps 2 and 3 is ... 	  	THEN ...
equal to or more than the amount in Step 1 	  	you cannot take the credit.
less than the amount in Step 1 	  	you can take the credit.

Figuring the credit.   If you can take the credit, subtract the total of
Step 2 and Step 3 from the amount in Step 1 and multiply the result by 15%.

  In certain cases, the amount of your credit may be limited. See Limit on
credit, later.

Example.

You are 66 years old and your spouse is 64. Your spouse is not disabled.
You file a joint return on Form 1040. Your adjusted gross income is
$14,630. Together you received $3,200 from social security, which was
nontaxable. You figure the credit as follows:
1) 	Initial amount 	  	$5,000
2) 	Subtract from line 1 the total of: 	  	  	  	 
  	a) Nontaxable social security and other nontaxable pensions 	  	$3,200 	  	 
  	b) Excess adjusted gross income
[($14,630 - $10,000) χ 2] 	  	2,315 	  	5,515
3) 	Balance (Not less than -0-) 	  	-0-
4) 	Credit 	  	-0-

You cannot take the credit because your nontaxable social security (line
2a) plus your excess adjusted gross income (line 2b) is more than your
amount on line 1.
Limit on credit.   The amount of credit you can claim may be limited.

  Figure any limit on your credit on lines 21-24 of Schedule R or lines
21-22 of Schedule 3.

Credit Figured for You

If you choose to have the Internal Revenue Service (IRS) figure the credit
for you, read the following discussion for the form you will file (Form
1040 or 1040A). If you want the IRS to figure your tax, see chapter 30.
Form 1040.   If you want the IRS to figure your credit, see Form 1040 Line
Entries under Tax Figured by IRS in chapter 30.

Form 1040A.   If you want the IRS to figure your credit, see Form 1040A
Line Entries under Tax Figured by IRS in chapter 30.

Example

The following example illustrates the credit for the elderly or the
disabled. The initial amount is taken from Table 33-1, shown earlier.

Example.

James Davis is 58 years old, single, and files Form 1040A. In 1998 he
retired on permanent and total disability, and he is still permanently and
totally disabled. He got the required physician's statement in 1998, and
kept it with his records. His physician signed on line B of the statement.
This year James checks the box in Part II of Schedule 3. He does not need
to get another statement for 2005.

He received the following income for the year:
Nontaxable social security 	$1,500
Interest (taxable) 	100
Taxable disability pension 	11,400

James' adjusted gross income is $11,500 ($11,400 + $100). He figures the
credit on Schedule 3 as follows:
1) 	  	Initial amount 	  	$5,000
2) 	  	Taxable disability pension 	  	11,400
3) 	  	Smaller of (1) or (2) 	  	5,000
4) 	  	Subtract from line 3 the total of: 	  	  	 
  	  	a) Nontaxable disability benefits (social security) 	$1,500 	  	 
  	  	b) Excess adjusted gross income
[($11,500 - $7,500) χ 2] 	2,000 	  	3,500
5) 	  	Balance (Not less than -0-) 	  	1,500
6) 	  	Multiply line 5 by 15% (.15) 	  	225
7) 	  	Enter the amount from Form 1040A, line 28. 	  	  	333
8) 	  	Enter any amounts from Form 1040A, line 29. 	  	  	-0-
9) 	  	Subtract line 8 from line 7 	  	  	333
10) 	  	Credit
(Enter the smaller of line 6 or line 9) 	  	  	$225

His credit is $225. He enters $225 on line 30 of Form 1040A. The Schedule 3
for James Davis is not shown.