Living on Social Security? Here’s a Tax Credit Just for You

If you’re 65 or older and meet certain income requirements, the Credit for the Elderly or the Disabled may knock thousands off your tax bill.

By: Wendy Connick (imwconn) Featured on The Motley Fool

If you’re among the 23% of married retirees or the 43% of single retirees who rely on Social Security for 90% or more of their income, then you likely qualify for the Credit for the Elderly or the Disabled — a tax credit that can save you thousands of dollars every year. For that matter, even retirees with other sources of income may qualify for this tax credit. Here’s how to find out if you’re one of them.
Requirements for the Credit for the Elderly or the Disabled

The Credit for the Elderly or the Disabled is intended for two different groups of people — and you’ve probably already guessed who they are based on the name of the credit. You can qualify for this credit if you’re either 65 or older by the end of the year, or you’re younger than that and you retired early on permanent and total disability.

You’ll also need to meet certain income limits to qualify for the credit. There are two different sets of income limits: one that looks at your adjusted gross income (AGI) for the year and one that looks at the total of your nontaxable Social Security benefits, pensions, annuities, and disability income. If you meet both of these income limits, you can qualify for the credit. Here are the limits for 2017:

Filing Status                                                 AGI Limit                                            Nontaxable Income Limit

Single, head of household,                               $17,500                                                    $5,000
or qualifying widow(er)

Married filing jointly                                         $20,000                                                  $5,000
and only one spouse qualifies

Married filing jointly                                         $25,000                                                  $7,500
and both spouses qualify

Married filing separately                                  $12,500                                                    $3,750
(only if you lived apart from your
spouse for the whole year)

How the income limits work

It’s possible to have quite a lot of nontaxable income in retirement if you’re lucky enough to have an employer-provided pension or an annuity purchased with post-tax funds. Because the Credit for the Elderly or the Disabled is meant for low-income retirees, the IRS doesn’t want to hand it out to people with loads of nontaxable income. Therefore it splits 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 nontaxable 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’d subtract student loan interest, tuition and fees, and alimony payments from gross income to arrive at your AGI for the year. You’ll find your AGI on line 21 of Form 1040A and line 37 of Form 1040.

The nontaxable income limit includes the nontaxable part of your Social Security benefits plus any nontaxable pension, annuity, or disability income you received during the year. Interestingly, this limit does not include distributions from any Roth accounts you possess.

How to claim the credit

To claim the Credit for the Elderly or the Disabled, you’ll need to fill out Schedule R 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’s a worksheet on Schedule R that you can use to calculate the amount of your credit. You can also ask the IRS to calculate your credit for you. Note that this is a nonrefundable credit: It cannot exceed the amount you owe in taxes for the year, so it can’t get you a refund check (or increase the refund you’re already getting).

If you decide you want the IRS to calculate the credit for you, you’ll need to complete Part I and (if you’re disabled) Part II of Schedule R, along with lines 11 and 13 from Part III. If you use a Form 1040A for your tax return, write “CFE” to the left of line 32; if you use Form 1040 instead, check box “c” on line 54 and write “CFE” on the line next to that box. If you use Schedule R to calculate the amount of your credit, write “Schedule R” instead of “CFE” on those lines on your 1040 return and enter the amount from line 22 of Schedule R.

Claiming this tax credit does add a certain amount of hassle to preparing your tax return, but because it can reduce your tax bill by thousands of dollars, it’s worth the trouble. If you’re having trouble completing your tax return, consider making an appointment at your nearest Tax Counseling for the Elderly (TCE) office. These volunteers will provide free tax help and are specially trained in preparing returns for taxpayers aged 60 and up. They’ll be able to help you claim this tax credit and any others you qualify for, knocking your tax bill for the year to the bare minimum.