Don't overlook tax breaks for people with disabilities

Many of the millions of people with disabilities may be paying more in taxes than necessary, according to Allsup, a nationwide provider of Social Security Disability Insurance (SSDI) representation and Medicare plan selection services.

Taxes are due April 18 this year. There is free assistance for low-income Minnesotans through the Accountability Minnesota program, which has clinic around the region. Call them at 651-287-0187 or go to www.accountabilitymn.org for help.

There is also free information to help Minnesotans and North Dakotans properly screen their paid tax preparers, through the Better Business Bureau of Minnesota and North Dakota (BBB). The BBB encourages taxpayers to do their research before selecting tax preparation help or they may get hit with fines and fees if the return isn’t correct or filed late. The BBB also cautions against tax preparers who claim they can obtain larger refunds than other tax preparers. According to the IRS, if your returns are prepared correctly, every preparer should derive substantially similar numbers.

In 2009, the BBB received more than 3,000 complaints against tax preparers. Commonly, complainants stated that the tax preparer made errors in their return which resulted in fines and fees. The IRS reports that roughly 80 percent of Americans enlist the help of a tax preparer or tax software when filing their taxes.

“Many people depend upon their tax refunds to cover bills and basic living expenses,” said Dana Badgerow, president and CEO of the Better Business Bureau. “Therefore, if you choose to have someone else do your taxes, it’s important you know their background, as well as their qualifications.” The BBB reminds taxpayers they are legally responsible for what’s on their own tax returns, even if they’re prepared by someone else, and offers the following advice on how to find a trustworthy tax preparer, as well as some things to keep in mind. Check reports on individual tax preparers at www.bbb.org

When taxes are prepared, consider what is available for people with disabilities. “People with disabilities often aren’t aware of tax credits and deductions that could help them save money,” said Paul Gada, a tax attorney and personal financial planning director for the Allsup Disability Life Planning Center. “In fact, certain credits are refundable, meaning you can get money back even if you owe no taxes.”

Allsup reminds people with disabilities and their tax preparers to know how SSDI and other benefits are taxed. Up to 50 percent of SSDI benefits are taxable each year. The amount is determined by adding one-half of your SSDI benefits to all of your other income sources. For 2010, taxes are owed on any amount above $32,000 for couples filing jointly and $25,000 for individuals.

“The average monthly SSDI benefit for 2010 was $1,064 or $12,768 for the year. As a result, many people relying on SSDI will not owe taxes,” Gada said. “However, they still should consider filing a tax return if credits could mean a refund.”

Lump-sum SSDI benefits must also be considered. Because it can take years to receive disability benefits, most people initially receive a lump-sum amount, which includes back payments. Paying taxes on this amount in one year is a mistake and could be financially costly, pushing you into a higher tax bracket. The IRS allows taxes on this lump-sum payment to be spread over previous tax years using the current-year tax return. This means recipients do not have to go through the time or expense of filing amended returns. However, the calculations are complex, and Gada advises seeking tax assistance. Allsup provides a list of free tax help resources for people with disabilities on its website.

People with disabilities may rely on additional benefits for income. Generally, workers’ compensation benefits and compensatory damages for injuries aren’t taxed. Additionally, long-term disability (LTD) insurance benefits are not included in taxable income if you paid the premiums with after-tax dollars. However, they are taxable and must be included in your income if you paid LTD premiums with pre-tax dollars as part of a cafeteria plan, for example, or your employer paid your premiums.

Another key step is to claim tax credits. Tax credits offer one of the most effective ways to lower taxes because they provide a dollar-for-dollar tax reduction or refund. Some important tax credits people with disabilities are commonly eligible for include: earned income tax credit (up to $5,666), specific credit for the disabled (up to $7,500) and dependent care credit.

Also, look at deductions such as the increased standard tax deduction for the blind or visually impaired, medical deductions, the costs of seeking SSDI benefits and other deductions.

Information from Better Business Bureau, Allsup and Accountability Minnesota was used in compiling this article.

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