Tax Credits and People with Disabilities

The EIC Can Help Workers with Disabilities and Families Raising Children With Disabilities

Can a person who receives disability benefits get the EIC and Child Tax Credit (CTC)?

To be eligible for the EIC, individuals must have earned income. Most disability-related benefits are not considered earned income, but a person who receives long-term, employer-paid disability benefits and is under minimum retirement age can qualify for the EIC, even if he or she did not work during the tax year. (Minimum retirement age is the earliest age at which a worker can receive a pension or annuity if not disabled.) Such disability benefits are considered taxable income, are reported as wages on tax returns and are considered earned income in determining eligibility for the EIC and the CTC refund.

Benefits such as Social Security Disability Insurance, SSI, military disability pensions, and payments from individually purchased disability insurance policies are not counted as earned income. Individuals who receive these types of benefits may qualify for the EIC and the CTC refund if they, or their spouse, also have earned income.

Can children with disabilities be claimed for these tax credits?

The EIC — a worker may claim a person with total and permanent disabilities of any age as a “qualifying child” for the EIC if that person otherwise meets the qualifying child rules for the EIC.

For example, parents may claim their adult children if they have such disabilities. Also, persons who are caring for relatives with such disabilities who meet the other rules for a “qualifying child” may be able to claim them for the EIC.

Note: If the person with disabilities is claimed under the qualifying child rules for a foster child, an authorized agency must have placed that person in the care of the worker.

The CTC — a child claimed for the CTC, including a child with disabilities, must be under age 17 at the end of the year. Qualifying children with disabilities may themselves receive income from benefits such as SSI. A worker’s eligibility to claim such children for the EIC is not affected by the fact that the child receives SSI payments. This also applies to CTC eligibility, unless more than half of the child’s support is provided by SSI and other benefits. In that case, the CTC may not be claimed.

A person with total and permanent disabilities who is able to earn income may be eligible to claim the EIC, if the eligibility rules are met. However, if that person lives with parents or other relatives who can claim him or her as a qualifying child, the worker is not eligible to claim the EIC.

Will claiming the EIC or CTC affect eligibility for other benefits upon which people with disabilities rely?

Income. Congress enacted legislation in January 2013 which permanently excludes any federal tax refund from counting as income in determining eligibility, or the amount of benefit, for any federally-funded public benefit program. This includes state and local programs only partially funded by federal dollars. Tax refunds can include benefits from the EIC, CTC, other tax credits, or refund of a filer’s over withheld income tax.

Resource test. The legislation also provides that refunds that are saved by the filer do not count against the resource limits of any federally-funded public benefit program for 12 months after the refund is received.

Other tax benefits. Individuals who claim the federal Credit for the Elderly or the Disabled on their tax returns may also claim the EIC and CTC, if eligible. For more information on this tax credit, see IRS Publication 524.

State EIC refunds. 24 states and DC have state EICs in effect for 2014. Federal and state public benefit program rules for state EIC refunds are not necessarily the same as those for the federal EIC. For more information, see “State Earned Income Credits” or contact the Center on Budget and Policy Priorities at 202-408-1080.