Schedule R: The Tax Credit for the Elderly or the Disabled

People age 65 or older and those who have retired early due to disability can be eligible for a federal tax credit ranging from $3,750 to $7,500. The credit for the elderly or the disabled reduces federal income taxes for those who qualify, but several eligibility rules apply.

Who Qualifies for Schedule R?

Schedule R (Form 1040) can help you figure the credit for the elderly or the disabled. To qualify, you must be a U.S. citizen or resident alien who: 

• Reached age 65 before the last day of the tax year, or
• Was under age 65 at the end of the tax year and meet all three of these requirements:

1. You retired before the last day of the tax year and were permanently and totally disabled when you retired,
2. You received taxable disability income during the year,
3. You were younger than the mandatory retirement age set by your employer, if they have one.

The Disability Requirement 

The IRS defines you as permanently and totally disabled if you meet several requirements.

• You can no longer perform any substantial gainful activity. If you're paid below minimum wage, that's not considered to be gainful and if you're performing make-work, that's not considered substantial. The activity must be both substantial and gainful to disqualify you.
• A qualified physician must certify you've had the condition or you're expected to have it continuously for at least 12 months, or it's likely to result in your death.

Retiring on Disability 

You don't necessarily have to formally retire. You can be considered retired on disability if you've been forced to stop working because of your disability.

Disability income must be paid under your employer's accident and health plan or pension plan, and it must be included in your income as wages or payments instead of wages for the time you are absent from your job because of permanent and total disability.

Any payment you receive from a plan that doesn't provide for disability retirement isn't disability income. For example, a lump-sum payment for accrued annual leave that you receive when you retire on disability is a salary payment and it isn't disability income. Disability income doesn't include amounts you receive after you reach a mandatory retirement age set by your employer when you would have had to retire even if you hadn't become disabled.

Income Limits

In addition to the other qualifying factors, a taxpayer’s adjusted gross income (AGI) must be lesser than or equal to the following amounts as of the 2021 tax year (the return you'll file in 2022).

How To Calculate the Credit

The tax credit is 15% of the initial amount, less the total of nontaxable Social Security and certain other nontaxable pensions, annuities, or disability benefits you've received. You must also add one-half of your adjusted gross income (AGI), less the AGI limitation amount. Here are the steps to calculate your credit (we'll go into each step in more detail below):

1. Figure out your initial amount.
2. Add up your total nontaxable Social Security and other nontaxable pensions.
3. Calculate your excess adjusted gross income and divide it by two.
4. Add step 2 to step 3.
5. Subtract the sum of steps 2 and 3 from the initial amount, then multiply the result by 15%.

This formula gives you a tentative tax credit. You then need to compare the tentative credit to the federal tax liability as calculated using the "Credit Limit Worksheet" found in the Instructions for Schedule R. The final tax credit is the smaller of the tentative amount or the tax liability limit amount.

The Initial Amount 

Your initial amount is the lesser of your taxable disability income or the following set amounts as of the 2021 tax year:

Nontaxable Pension Benefits 

The following sources of income are included when measuring the nontaxable portion of pension benefits:

• Nontaxable Social Security payments, before deducting certain Medicare premiums and workers' compensation benefits.
• Nontaxable Railroad Retirement Board benefits treated as Social Security
• Nontaxable pension, annuity, or disability payments from the Veterans Administration, with certain exceptions
• Any other pension, annuity, or disability benefit that is excluded from income

The following types of income are not included when measuring the nontaxable portion of pension benefits:

• Amounts that are treated as a return of your cost of the pension or annuity
• Disability annuity payable under Section 808 of the Foreign Service Act of 1980
• Any 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.

AGI Limitations

The following AGI figures are used to calculate the credit:

How to Claim the Credit

Claiming the credit for the elderly or the disabled requires filing two additional forms with your tax return. Schedule R shows your calculations as to how you arrived at the amount of your credit. You must then enter the total from this form in Line 6d of Schedule 3.

Frequently Asked Questions (FAQs)