- Disability benefits are often taxable according to state and federal law. Deductions in the form of a tax credit are available in many circumstances. If you are single or a widower, the head of a household, or if your adjusted gross income plus Social Security that is not taxed is less than $17,500, you can receive credit. If you are taking care of a disabled person, you can apply for a Dependent Care Credit on your taxes. This is only applicable if the disabled person cannot take care of himself.
- Do not pay taxes on worker's compensation. If you are receiving money for an on-the-job condition that has caused disability, this amount is not taxable. If you are receiving sick pay due to your disability that is due to sickness not caused by the job, and not considered worker's compensation, that amount is taxable. In line 7 of your 1040, include any sick pay from welfare, state sickness or disability fund, or an insurance company.
If you are disabled and still working, you can deduct business expenses any impairment-related expenses required to perform your job properly. Claiming these expenses as work-related as opposed to medical means you are not subject to the 7.5 percent adjusted gross income cap you are required to recognize for medical expenses. - Some disabled taxpayers have large medical expenses with some of these payment being tax-deductible. If your medical expenses are more than 7.5 percent of your adjusted gross income, those expenses can be deducted. Medical expenses include insurance, physician fees, drugs, hospitalization and rehabilitation, as well as any equipment the disabled person may need to purchase for quality of life. If the disabled individual has to attend a special school for mental or physical issues, such as blindness or learning disabilities, the cost of the schooling can be deducted.
Any improvements to the home such as ramps or the removal of walls that may inhibit movement around the house can be deducted as a medical expense.
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