Vol. 5, No. 2 March/April 1997	Previous Issues Subscribe to AT Messenger Download PDF Viewer
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Financing Assistive Technology: Understanding Taxes Can Improve Access to AT

Ron Sibert, DATI Funding Specialist

Well, ‘tis the season once again for all good taxpayers to begin filing their returns. To the extent that one can capitalize on certain tax advantages, deductions, etc., to increase usable income, that person’s ability to afford assistive technology (AT) can be significantly improved. The Internal Revenue Code (IRC), the federal income tax law (covered under Title 26 of the U.S. Code), and its accompanying regulations contain several provisions that can be very useful to persons with disabilities, their families, and even their employers. One of the latest developments, for example, came as part of the Health Insurance Portability and Accountability Act passed in August 1996. As of January 1 [1997], the law allows individuals who itemize to deduct part of their premiums and lets employers deduct costs of such insurance for workers.[2] Also, beginning in 1997, individuals who are self-employed will have an insurance tax deduction phased in; starting with a deduction of 40% of premium costs in 1997, increasing to 80% in 2006. (The concept of deductions is discussed in more detail below.) The Act also allows employers to set up tax-free accounts for employees, up to a maximum of $3,375, which may then be applied to the purchase of medical devices and services. Unfortunately, these provisions cannot be applied on 1996 tax returns. However, there are also several long-standing provisions that are currently available to people with disabilities and their families.

Before describing these provisions, it might be best to start with an explanation of key terms. First, the concept of income is the basis for most tax benefit-related calculations, and there are a few important types to consider. Those are: gross income (GI), adjusted gross income (AGI), and everyone’s favorite, taxable income (TI). By law, GI includes income realized in any form, whether in money, property, or services, unless excluded by law. There are several possible exclusions (that is, income that is not counted) for people with disabilities. Examples of such exclusions are Supplemental Security Income (SSI) and the cost of public services like special education and vocational rehabilitation for which beneficiaries are not generally charged. AGI is GI minus nontaxable/deferred tax income (such as your and/or your spouse’s individual retirement account [IRA] deduction, or unreimbursed business expenses). Personal exemptions—$2550 allowed for each taxpayer, spouse, and each of their dependents—are one category of figures subtracted from AGI to get to taxable income. Deductions are another category of income adjustments, or amounts that may be subtracted from AGI to get to taxable income—or from GI to get to AGI. (Either way, the desired result is reduced taxable income.) Taxable income is the difference between your AGI and your standard or your itemized deductions. The more deductions one has, the lower is taxable income (that is, the lower the tax pay-out and/or the higher the tax refund). The standard deduction varies based on one’s filing status (e.g., single [$4,000]; married filing jointly [$6,700]; married filing separately [$3,350]; or head of household [$5,900]). Additional standard deductions are available for people over age 65, those who are permanently disabled, and for those who are blind. Note that the additional standard deductions are additive. That is, one may take an additional deduction for each category into which s/he falls. For example, a person who is 67 years old and is blind may take the standard deduction appropriate to his/her filing status, plus the two additional standard deductions for age and blindness.[3] Finally, it may be more advantageous for some people to itemize their deductions. This is true when a person has deductible interest payments or business and/or health care expenses that exceed the standard deduction. In fact, itemization is not permitted unless the sum of all itemized deductions exceeds one’s standard deduction amount.

Probably the most common and flexible deductions affecting people with disabilities seeking AT are available to all taxpayers: the deduction for medical, dental and other health care expenses, and miscellaneous work expenses. Medical expenses are not deductible in their entirety—only the portion that exceeds 7.5% of AGI. Even so, AT is deductible on the basis of the statutory definition of medical care which includes amounts paid “for the diagnosis, cure, mitigation, treatment or prevention of disease or for the purpose of affecting any structure or function of the body.”[4] For people with disabilities who use AT, this definition has far-reaching implications. Even if no other part of that definition applied, the extent to which AT affects restoration of function is indisputable, and should be deductible on that basis alone. The miscellaneous category of expenses that may be deducted are those that are work-related (e.g., equipment, publications, apparel, etc., that a person uses at work—not Impairment-Related Work Expenses, the Social Security work incentive). This very broad category of expenses are treated as Miscellaneous Itemized Deductions (MIDs). Compared to deductible health care expenses, MIDs have a lower threshold—2% of AGI.[5]

Deductible medical care expenses can be useful in leveraging another possible AT funding, source—qualified retirement plans. Despite the general inadvisability of early withdrawals from tax-deferred retirement programs, there may be times when doing so is necessary in an emergency or as a last resort. Funds that are withdrawn prematurely from tax-deferred accounts are subject to penalties in the form of additional taxes (tax liability beyond and separate from regular tax responsibilities). However, if the proceeds of the withdrawal were spent for deductible medical expenses (that is, those exceeding 7.5% of AGI), that amount would not be subject to penalty. Similarly, if the reason for the withdrawal is attributable—that is, directly related—to a person’s disability, s/he can claim a penalty exemption (using form 5329 - Additional Taxes Attributable to Qualified Retirement Plans (including IRAs), Annuities, and Modified Endowment Contracts).[6]

Another even more powerful means of reducing one’s tax liability is through the application of tax credits. Credits are different from deductions in that they are subtracted directly from the tax owed, whereas deductions only reduce TI, the income figure upon which the tax amount is based. Credits are more effective in reducing tax liability because the amount owed in taxes is reduced by exactly the amount of the credit. Deductions, by contrast, reduce the amount of tax owed by just a fraction (typically 15-20%) of the numerical value of the deduction. Also note that credits may be claimed regardless of whether a person chooses to itemize or to take standard deductions. The new health insurance portability law contains a good example of a tax credit. This credit allows a person who purchases his/her own health care policy to deduct part of the cost of the premium (provided that the person’s medical expenses for that tax period exceed 7.5% of AGI). People who are 51-60 years old can deduct $750 of their premiums from their taxes; up to $2000 may be deducted by those over 60 years of age, and up to $2500 for those over 70.[7] Note that credits contained in the insurance portability law will not apply to your 1996 taxes; they will for 1997.

There are other currently available credits as well. For example, the Dependent Care Credit may be applied to expenses incurred by a taxpayer for the care of a dependent who has one or more disabilities when such care would enable the taxpayer (frees the taxpayer) to work. Simply complete and attach form 2441—a new development for the 1996 tax year. No medical certification of disability is required in this case. This is not true, however, of the disability portion of the Credit for the Elderly and Disabled. In order to take the credit for disability, one must have a medical certification of disability and be incapable of substantial gainful activity (SGA). Tax filers under age 65 must have the treating physician complete a statement certifying that s/he is permanently and totally disabled, and attach that statement to the tax return (Schedule R-Form 1040 or Schedule 3-Form 1040A). The credit for the elderly is available to all persons who were age 65 or older at the end of the tax year. The required forms are the same in either case; and the amount always varies by filing status.

According to the U.S. Treasury Department, SGA is the performance of significant duties over a reasonable period of time while working for pay or profit, or in work generally done for pay or profit. Full-time work (or part-time work done at your employer's convenience) in a competitive work situation for at least the minimum wage conclusively demonstrates the ability to engage in SGA. The following examples illustrate the tests of SGA.

Example 1. Trisha, a sales clerk, retired on disability. She is 53 years old and now works as a full-time baby-sitter for the minimum wage. Even though Trisha is doing different work, she is able to do the duties of her new job in a full-time competitive work situation for the minimum wage. She cannot take the credit because she is able to engage in substantial gainful activity.

Example 2. Tom, a bookkeeper, retired on disability. He is 59 years old and now drives a truck for a charitable organization. He sets his own hours and is not paid. Duties of this nature generally are performed for pay or profit. Some weeks he works 10 hours, and some weeks he works 40 hours. Over the year he averages 20 hours a week. The kind of work and his average hours a week conclusively show that Tom is able to engage in substantial gainful activity. This is true even though Tom is not paid and he sets his own hours. He cannot take the credit.

Example 3. John, who retired on disability, took a job with a former employer on a trial basis. The purpose of the job was to see if John could do the work. The trial period lasted for 6 months during which John was paid the minimum wage. Because of John's disability, he was assigned only light duties of a nonproductive make-work nature. The activity was gainful because John was paid at least the minimum wage. But the activity was not substantial because his duties were nonproductive. These facts do not, by themselves, show that John is able to engage in substantial gainful activity.[8]

Note that this SGA test for tax credits differs significantly from that which qualifies a person for Social Security Disability Insurance. The two should not be confused.

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[2] The Wall Street Journal, January 2, 1997, pg. 1.

[3] The additional standard deductions also vary by filing status.

[4] Section 213, IRC

[5] Chapters 4 & 6 of Steven B. Mendelsohn’s Tax Options and Strategies for People with Disabilities [Demos Publications, 1993] provides excellent discussions of the legal basis for AT’s deductibility.

[6] Mendelsohn, Ibid., pgs. 168-170

[7] J. L. Romano, Esq., January 1997 update to Legal Rights of the Catastrophically Ill and Injured: A Family Guide, pg. 281.

[8] Website of the U.S. Treasury Department: http://www.irs.ustreas.gov