New Tax Advantages

The Taxpayer Relief Act of 1997 made changes to the federal income tax code, some favoring people with disabilities. Increases in the personal exemption, standard deduction and gross income filing requirements affect everyone. Below are brief descriptions of some specific disability-related changes affecting 1997 returns to be filed by April 1998.

Adoption credit: Beginning January 1997, taxpayers qualify for a nonrefundable credit for adoption expenses up to $5,000 per child. For children with special needs, the credit is $6,000. Children must be under age 18. Special needs, to be determined by the state of residence, are defined to include: ethnic background, age, minority group status, presence of siblings, chronic medical condition or emotional or physical handicap. The credit phases out when modified Adjusted Gross Income (AGI) exceeds $75,000.

Employer payment of qualified adoption expenses under an adoption assistance program are not taxable up to the $5,000 and $6,000 amounts.

The additional standard deduction for those age 65 or older or blind is $1,000 for 1997.

The Earned Income Credit has been adjusted for inflation. Income limitations are $9,770 for persons with wages with no qualifying children, a category including thousands of adults with disabilities on SSI/SSDI.

The applicable percentage for self-employed who pay health insurance premiums has increased to a 40% deduction.

Medical Savings Accounts (MSAs)

Beginning in 1997, MSAs are available for up to 750,000 employees. Eligible taxpayers must: be self-employed or work for a business with 50 or fewer employees; have an employer-sponsored medical insurance policy with an annual deductible amount between $3,000-$4,500 for families or between $2,250-$2,500 for individual coverage; not to be covered by any other health insurance plan unless the plan provides only limited coverage such as supplemental Medicare, disability, dental and vision care, or long-term care; current medical insurance must have an annual limit on out-of-pocket expenses of $5,500 or less for families, $3,000 or less for individuals. MSA funds can be used to pay for the health insurance deductible amounts in addition to medical goods and services covered under the current rules for medical deductions on Schedule A (e.g., personal assistance and assistive technology). Money withdrawn is tax-free income. MSA funds can be withdrawn for purposes other than medical if the taxpayer is disabled or age 65 or older.

Capital gains rules on sale of main home

are substantially revised for all taxpayers, with an exclusion up to $250,000 of gain for a home sold after May 6, 1997. The exclusion can be used every two years. The rules for owning and using a home as a principal residence for an aggregate of two years during the five years prior to sale or exchange are met if the taxpayer is physically or mentally incapable of self-care and resides in a facility that provides care for his condition, and he had lived in the principal residence for an aggregate of at least one year during the five years preceding the sale of the home.

Reprinted in its entirety with permission from UCPA's Washington Watch, December 16, 1997.