Living on Social Security? Here is a tax credit just for you
If you are one of the 23% of married retirees or the 43% of single retirees who rely on Social Security for 90% or more of their income, you likely qualify for the Senior Citizen or Disability Credit, a tax credit that can save you thousands of dollars each year. Moreover, even retirees with other sources of income may be entitled to this tax credit. Here’s how to find out if you’re one of them.
Requirements for Senior Citizen or Disability Credit
the Credit for the elderly or disabled is aimed at two different groups of people – and you’ve probably already guessed who they are based on the name of the credit. You may qualify for this credit if you are 65 or older at the end of the year, or if you are younger than that and have retired early due to permanent and total disability.
You will also need to meet certain income limits to qualify for the credit. There are two different sets of income limits: one that takes into account your adjusted gross income (AGI) for the year and whoever looks at your total not taxable Social security benefits, pensions, annuities and disability income. If you meet these two income limits, you may qualify for the credit. Here are the limits for 2017:
Filing status |
AGI limit |
Non-taxable income limit |
---|---|---|
Eligible single, head of household or widow(er) |
$17,500 |
$5,000 |
Married filing jointly and only one spouse is eligible |
$20,000 |
$5,000 |
Married filing jointly and both spouses are eligible |
$25,000 |
$7,500 |
Married to be filed separately (only if you have lived apart from your spouse for the whole year) |
$12,500 |
$3,750 |
How revenue caps work
It is possible to have a lot of tax-free income in retirement if you are lucky enough to have an employer pension or annuity purchased with after-tax funds. Because the elderly or disabled credit is intended for low-income retirees, the IRS does not want to distribute it to people with non-taxable income. Therefore, it divides the income limits for this credit into two parts: one that looks at a retiree’s total taxable income and another that looks at certain types of non-taxable income.
Your gross income is the total taxable income you received for the year; adjusted gross income is your gross income minus certain adjustments. For example, you subtract student loan interest, tuition and fees, and child support payments from gross income to arrive at your AGI for the year. You can find your AGI on line 21 of Form 1040A and line 37 of Form 1040.
The non-taxable income limit includes the non-taxable portion of your Social Security benefits plus any non-taxable pension, annuity, or disability income you received during the year. Interestingly, this limit not include distributions from all Roth accounts you own.
How to claim the credit
To apply for the seniors’ or disabled’s credit, you will need to complete Planner and use Form 1040 or Form 1040A for your tax return (not 1040EZ). The maximum amount you can claim ranges from $3,750 to $7,500 depending on your filing status. There is a worksheet on Schedule R that you can use to calculate your credit amount. You can also ask the IRS to calculate your credit for you. Note that this is a non-refundable credit: it cannot exceed the amount you owe in taxes for the year, so it cannot get you a refund check (or increase the refund you receive already).
If you decide you want the IRS to calculate the credit for you, you will need to complete Part I and (if you are disabled) Part II of Schedule R, as well as lines 11 and 13 of Part III. If you are using a Form 1040A for your tax return, write “CFE” to the left of line 32; if you are using Form 1040 instead, check box “c” on line 54 and write “CFE” on the line next to that box. If you are using Schedule R to calculate your credit amount, write “Schedule R” instead of “CFE” on these lines of your 1040 return and enter the amount from line 22 of Schedule R.
Claiming this tax credit adds some hassle to your tax return preparation, but since it can reduce your tax bill by thousands of dollars, it’s worth it. If you are having difficulty completing your tax return, consider making an appointment with your Tax Consulting Firm for the Elderly (TCE). These volunteers will provide free tax assistance and are specially trained in preparing returns for taxpayers aged 60 and over. They will be able to help you claim this tax credit and any others to which you are entitled, reducing your tax bill for the year to a bare minimum.