The Credit for the Elderly or Disabled is a nonrefundable credit not often encountered that may apply to low-income taxpayers age 65 or older or individuals under age 65 who are retired on permanent and total disability and receive taxable disability income.

A qualified individual for this credit must be a U.S. citizen or resident alien, and either of the following applies.

1. Age 65 or older at the end of the tax year. An individual is considered to be age 65 on the day before their 65th birthday. As a result, if born on January 1, they are age 65 at the end of the prior year.

If preparing a return for someone who died during the year, consider the taxpayer to be age 65 at the end of the year if they were age 65 or older at the time of death.

2. Under age 65 at the end of the tax year and all three of the following statements are true.

a. The taxpayer retired on permanent and total disability (explained later).

b. The taxpayer received taxable disability income for the tax year.

c. On January 1, of the tax year, the taxpayer had not reached mandatory retirement age (defined later under Disability Income).

The taxpayer must be a U.S. citizen or resident alien (or be treated as a resident alien) to take the credit. Generally, the credit cannot be taken if the taxpayer was a nonresident alien at any time during the tax year.

Exception – A taxpayer may be able to take the credit if they are a nonresident alien who is married to a U.S. citizen or resident alien at the end of the tax year and the taxpayer and spouse elect to treat the nonresident alien spouse as a U.S. resident alien. If they make that choice, both are taxed on worldwide incomes. See chapter 1.00 for further details of the election.

If an individual was a nonresident alien at the beginning of the year and a resident alien at the end of the year, and was married to a U.S. citizen or resident alien at the end of the year, the individual may be able to choose to be treated as a U.S. resident alien for the entire year. In that case, they may be allowed to take the credit (Pub 519).

Married Individuals - Generally, if taxpayers are married at the end of the tax year, they must file a joint return to take the credit. However, if they always lived apart during the tax year, they could file either a joint return or married separate returns and still take the credit.

Head of Household – If a married taxpayer lives apart from their spouse the last six months of the year, and the taxpayer meets the other requirements for head of household, the taxpayer can use the head of household filing status and claim the credit.

If under age 65 at the end of the year, a taxpayer can qualify for the credit only if they are retired on permanent and total disability (discussed next) and have taxable disability income (discussed later under Disability Income). A taxpayer is retired on permanent and total disability if:

• They were permanently and totally disabled when they retired, and

• They retired on disability before the close of the tax year.

Even if not retired formally, a taxpayer may be considered retired on disability when they have stopped working because of a disability.

Someone who retired on disability before 1977, and wasn’t permanently and totally disabled at the time, can qualify for the credit if they were permanently and totally disabled on January 1, 1976, or January 1, 1977.

An individual has a permanent and total disability if they can't engage in any substantial gainful activity because of a physical or mental condition. A qualified 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.

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

Substantial gainful activity isn't work an individual does to care for themself or their home. It isn't unpaid work on hobbies, institutional therapy or training, school attendance, clubs, social programs, and similar activities. However, the nature of the work taxpayers perform may show that they are able to engage in substantial gainful activity. The fact that a taxpayer hasen't worked or has been unemployed for some time isn't, of itself, conclusive evidence that they can't engage in substantial gainful activity. The following examples illustrate the tests of substantial gainful activity.

Example 1. Alex, a salesclerk, is retired on disability. Alex is 53 years old and now works as a full-time babysitter for the minimum wage. Although different work is performed, Alex can do the duties of the new job in a full-time competitive work situation for the minimum wage. The credit can’t be taken because Alex is able to engage in substantial gainful activity.

Example 2. Blake, a bookkeeper, is retired on disability. Blake is 59 years old and now drives a truck for a charitable organization. Blake is allowed to set his own hours and isn't paid. Duties of this nature are generally performed for pay or profit. Blake works 10 hours some weeks, and some weeks 40 hours. Over the year, Blake averages 20 hours a week. The kind of work and the average hours per week conclusively show that Blake can engage in substantial gainful activity. This is true even though Blake isn't paid and sets his own hours. Blake can't take the credit.

Example 3. Cameron, who retired on disability, took a job with a former employer on a trial basis. The purpose of the job was to see if Cameron could do the work. The trial period lasted for 6 months during which Cameron was paid the minimum wage. Because of Cameron's disability, only light duties of a nonproductive “make-work” nature were assigned. The activity was gainful because Cameron was paid at least the minimum wage. But the activity wasn't substantial because Cameron’s duties were non-productive. These facts don't, by themselves, show that Cameron is able to engage in substantial gainful activity.

Example 4. Deanne, who retired on disability from a job as a bookkeeper, lives with her sister who manages several motel units. Deanne helps her sister for 1 or 2 hours a day by performing duties such as washing dishes, answering phones, registering guests, and bookkeeping. Deanne can select the time of day when she feels most fit to work. Work of this nature, performed off and on during the day at Deanne's convenience, isn't activity of a “substantial and gainful” nature even if Deanne is paid for the work. The performance of these duties doesn't, of itself, show that Deanne is able to 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 include work centers that are certified by the Department of Labor (formerly referred to as “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, individuals usually don’t look for sheltered employment if they can get other employment. The fact that an individual has accepted sheltered employment isn't proof of the person's ability to engage in substantial gainful activity.

Physician's Statement - Taxpayers under age 65, must have a physician complete a statement certifying that they had a permanent and total disability on the date they retired. They can use the statement in the Instructions for Schedule R. This statement need not be filed with the tax return, but the taxpayer must keep it for their records.

Veterans - If the U.S. Department of Veterans Affairs (VA) certifies that the veteran has a permanent and total disability, the veteran can substitute VA Form 21-0172, Certification of Permanent and Total Disability, for the physician's statement that they are required to keep. VA Form 21-0172 must be signed by a person authorized by the VA to do so. This form can be obtained from a local VA regional office.

Physician's Statement Obtained In Earlier Year - If an individual got a physician's statement in an earlier year and, due to their continued disabled condition, they were unable to engage in any substantial gainful activity during the tax year, they may not need to get another physician's statement for that year. For a detailed explanation of the conditions that must be meet, see the instructions for Schedule R, Part II. If the required conditions are met, the box on Schedule R, Part II, line 2, should be checked.

If box 4, 5, or 6 in Part I of Schedule R is checked, 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 under age 65, the individual must also have taxable disability income to qualify for the credit. Disability income must meet both of the following requirements.

1. It must be paid under the taxpayer’s employer's accident or health plan or pension plan.

2. It must be included in the taxpayer’s income as wages (or payments instead of wages) for the time the individual is absent from work because of permanent and total disability.

Payments That Aren't Disability Income - Any payment received from a plan that doesn't provide for disability retirement isn't disability income. Any lump-sum payment for accrued annual leave received when the individual retires on disability is a salary payment and isn't disability income.

For purposes of the credit for the elderly or the disabled, disability income doesn't include amounts the individual receives after reaching mandatory retirement age. Mandatory retirement age is the age set by the employer at which the employee would have had to retire, had they not become disabled.

To determine if the credit can be claimed, two income limits must be considered. The first limit is the amount of the taxpayer’s adjusted gross income (AGI). The second limit is the amount of nontaxable Social Security and other nontaxable pensions, annuities, or disability income the individual received. The limits are shown in the table.

If AGI and nontaxable pensions, annuities, or disability income are less than the income limits, the taxpayer may be able to claim the credit.

Refer to the Schedule R instructions for additional information on completing Schedule R. Your tax software should complete this form and determine the credit based on your other input (taxpayer’s birthdate, filing status, type of income, etc.)

California has no similar credit.