For tax purposes, the IRS defines "disabled" in various contexts, primarily based on the inability to engage in substantial gainful activity due to a physical or mental condition. The specific criteria vary slightly depending on the tax benefit or filing requirement, but the core definition is consistent across most applications.
Core Definition of Disabled
- Substantial Gainful Activity (SGA): An individual is considered disabled if they are unable to engage in any substantial gainful activity because of a physical or mental impairment.
- Duration and Severity: The impairment must be expected to result in death or last for a continuous period of at least 12 months..
- Medical Certification: A physician’s statement or other medical evidence may be required to support the disability claim, particularly when claiming specific tax benefits or if requested by the IRS.
Context-Specific Applications
Retirement and Early Distributions
- For early distributions from retirement accounts (e.g., Traditional IRA, qualified plans), distributions due to disability are exempt from the 10% additional tax if the individual is permanently and totally disabled before age 59½.
Credit for the Elderly or the Disabled
- Individuals under age 65 may qualify for this credit if they are retired on permanent and total disability and have taxable disability income.
- Retirement on disability means stopping work due to the disability before the end of the tax year.
Dependents
- A child is considered permanently and totally disabled if they cannot engage in substantial gainful activity due to a physical or mental condition, and a doctor determines the condition has lasted or is expected to last at least one year or result in death.
- For qualifying relatives, income earned at a sheltered workshop (where medical care is the primary reason for attendance) may be excluded from gross income for dependency tests.
Financially Disabled for Refund Claims
- The time limit for claiming a refund is suspended if an individual is financially disabled—meaning they are unable to manage their financial affairs due to a medically determinable physical or mental impairment expected to last at least 12 months or result in death.
- A physician’s statement is required to support this claim.
Business Tax Incentives
- Businesses may claim the Disabled Access Credit using Form 8826 for expenses incurred to make facilities accessible to persons with disabilities.
- Impairment-related work expenses (such as attendant care) may be deductible as business expenses for eligible individuals.
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Disclaimer: Always verify with current Federal or State Department of Revenue Forms and Instructions. Tax rules may vary by jurisdiction and year. For complex situations, consult a CPA or tax attorney.