When planning for retirement or navigating life with a disability, understanding the tax system is vital to ensuring financial stability. For both groups, taxation isn’t just about paying money—it can also influence the support and benefits they receive. While the phrase “tax used as income” might be misleading, what we’re really talking about are the taxable and nontaxable income sources, deductions, credits, and special accounts that affect the financial lives of retirees and individuals with disabilities.
This article draws from IRS Publication 907 and other official sources to explain the types of income that are taxed (or not taxed), how benefits are reported, what tax credits are available, and what specific tools (like ABLE accounts and Social Security) exist to help.
Understanding Taxable and Nontaxable Income
The IRS makes it clear: all income is considered taxable unless a specific law excludes it. This principle applies to everyone, including retired individuals and people with disabilities.
Taxable Income
For people with disabilities and retirees, common sources of taxable income include:
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Disability pensions (if paid by an employer before retirement age)
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Traditional IRA distributions
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401(k) or 403(b) plan distributions
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Annuities
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Wages or self-employment income
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Social Security (in some cases)
Nontaxable Income
Certain forms of income are not taxed, such as:
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Supplemental Security Income (SSI)
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Certain veteran’s benefits
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Portions of Social Security income (depending on total income level)
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Disability payments from privately purchased insurance policies
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Disability payments resulting from terrorist attacks
Understanding what counts as taxable income helps people avoid surprises when it’s time to file their taxes—and potentially lower their overall tax bill by properly claiming exclusions and deductions.
Social Security and Railroad Retirement Benefits
my Social Security Account
Anyone receiving Social Security benefits—or planning to—should open a my Social Security account through the Social Security Administration (SSA). This online portal provides quick access to:
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Earnings history
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Estimated future benefits
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Benefit verification letters
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Replacement SSA-1099 forms
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Medicare cards
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Direct deposit changes
This platform is especially important for retirees and individuals with disabilities managing their income sources.
When Are Social Security Benefits Taxable?
Social Security benefits may be partially taxable depending on a person’s total income. The IRS uses the following formula:
Total income + Tax-exempt interest + Half of Social Security benefits
If the result exceeds certain thresholds, part of the benefits becomes taxable.
2024 Thresholds:
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Single, Head of Household, Qualifying Widow(er): $25,000
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Married Filing Jointly: $32,000
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Married Filing Separately (living apart): $25,000
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Married Filing Separately (living together): $0
For more detailed calculations, see IRS Form 1040 or 1040-SR, lines 6a and 6b, and Publication 915.
SSI Is Not Taxable
It’s important to note that Supplemental Security Income (SSI) is never taxable. This form of federal assistance is designed for people with limited income and resources and is excluded from gross income.
Disability Pensions and Other Disability Payments
Disability Payments Before Retirement Age
If you receive a disability pension from an employer-sponsored plan before reaching minimum retirement age (usually between 55 and 65, depending on the plan), that income is taxable as wages. It must be reported on Form 1040 or 1040-SR, line 1h.
Payments After Retirement Age
Once you reach the minimum retirement age, your disability payments become pension income, reported on lines 5a and 5b of Form 1040 or 1040-SR. This shift in classification affects how taxes are calculated.
Terrorist Attack-Related Disabilities
There is a special exemption for disability payments that result from injuries directly caused by terrorist attacks. For instance, those covered by the September 11th Victim Compensation Fund are generally not taxed on those benefits.
Pro Tip: If disability income is incorrectly reported as taxable on Form 1099-R, the payer should reissue it correctly or provide a Form W-2 with code “J” in Box 12.
ABLE Accounts – A Powerful Savings Tool
What Is an ABLE Account?
An ABLE account (Achieving a Better Life Experience) is a tax-advantaged savings account for individuals who are blind or have a disability diagnosed before the age of 26. These accounts allow them to save money without jeopardizing eligibility for public benefits like Medicaid or SSI.
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Tax Benefits: Earnings grow tax-free, and withdrawals are tax-free if used for qualified disability expenses.
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Contribution Limit (2024): $18,000 (increased if employed and not participating in a retirement plan)
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States Administer Programs: Each state has its own ABLE program with unique investment options and fees.
Compare state-specific ABLE programs at their official websites to choose the one best suited to your needs.
Qualified Disability Expenses
Funds in an ABLE account can be used for:
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Education
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Housing
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Transportation
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Health and wellness
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Assistive technology
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Legal fees
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Employment training
These expenses help maintain a person’s health, independence, and quality of life, as defined by the IRS.
Tax Credits Available to Retirees and Individuals with Disabilities
1. Credit for the Elderly or the Disabled (Form 1040, Schedule 3)
You may qualify for this credit if:
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You are 65 or older, or
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You are permanently and totally disabled
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Your adjusted gross income (AGI) and nontaxable income are below certain thresholds
The maximum credit ranges from $3,750 to $7,500, depending on filing status.
See Publication 524 for detailed eligibility and calculation instructions.
2. Earned Income Tax Credit (EITC)
People with disabilities who work, even part-time, may qualify for the EITC, a refundable tax credit that can increase their refund.
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You don’t need to have children to qualify.
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Your income must be below specific thresholds (which vary yearly).
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Social Security benefits or disability payments don’t count toward the earned income limit.
3. Child and Dependent Care Credit
If you pay for care for a disabled spouse or dependent so you can work, you may qualify for this credit. Expenses must be claimed on Form 2441, and you must meet earned income requirements.
Itemized Deductions and Other Tax Considerations
While many people use the standard deduction, some find it beneficial to itemize deductions, especially if they have significant medical or disability-related expenses.
Medical and Dental Expenses
You may deduct unreimbursed medical expenses that exceed 7.5% of your adjusted gross income (AGI). Eligible expenses include:
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Wheelchairs and other medical equipment
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Prescription medications
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Therapy
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Travel costs to and from medical treatment
Impairment-Related Work Expenses
If you’re employed and have a disability, you may be able to deduct the costs of services or equipment needed to work, such as:
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Job coaching
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Special transportation
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Modifications to your workplace
These deductions can be claimed even if you don’t itemize.
Household Employers and Disability Assistance
If you pay someone to assist with in-home care—whether for yourself or a disabled spouse/dependent—you may be considered a household employer.
Tax Responsibilities Include:
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Withholding and paying Social Security and Medicare taxes
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Filing Schedule H with your tax return
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Providing a W-2 form to your employee
See Publication 926, Household Employer’s Tax Guide, for full details.
Business Tax Incentives for Hiring Individuals with Disabilities
If you run a business, there are incentives for hiring and accommodating people with disabilities, including:
1. Work Opportunity Tax Credit (WOTC)
Employers who hire people with disabilities may claim a credit of up to $2,400–$9,600, depending on employee category and hours worked.
2. Disabled Access Credit (Form 8826)
Provides a nonrefundable credit of up to $5,000 for small businesses that remove barriers or improve accessibility for disabled employees and customers.
3. Barrier Removal Deduction
Businesses can deduct up to $15,000 per year for the cost of making facilities or transportation vehicles accessible.
Getting Help with Tax Preparation
The IRS provides several free resources to assist individuals with disabilities and retirees:
IRS Interactive Tax Assistant (ITA)
Visit IRS.gov/Help/ITA to search for answers to common questions.
Free Tax Help Programs
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Volunteer Income Tax Assistance (VITA) – Available to those with disabilities, seniors, and low-to-moderate incomes.
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Tax Counseling for the Elderly (TCE) – Tailored for people aged 60 and older.
You can also download or order publications and forms from:
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IRS.gov/Forms
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IRS.gov/OrderForms
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Or call 800-829-3676
Conclusion
Though taxes may seem complicated, understanding the rules around income, credits, deductions, and special accounts can make a significant difference in the lives of retirees and individuals with disabilities. By taking advantage of tools like ABLE accounts, monitoring benefits through a my Social Security account, and seeking out applicable tax credits and deductions, taxpayers in these groups can better manage their financial future and reduce their tax burden.
For more details, consult IRS Publication 907, speak with a tax professional, or access IRS help resources online.
