Federal Tax Provisions of Interest to the Disabled

Federal Tax Provisions of Interest to the Disabled

Order Code RL31563
CRS Report for Congress
Received through the CRS Web
Federal Tax Provisions of Interest to the Disabled
August 29, 2002
Louis Alan Talley
Specialist in Taxation
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

Federal Tax Provisions of Interest to the Disabled
Summary
In determining tax liability under present income tax laws, some relief is
provided to those individuals with physical and/or mental disability or to those who
help care for them. The special needs of these individuals are recognized through a
number of special Internal Revenue Code provisions.
Among those provisions available to individuals are:
! an additional standard deduction amount for blind individuals ($900
for elderly or blind married individuals or $1,150 for elderly or blind
single individuals for tax year 2002–with an inflation adjustment for
future tax years);
! the itemized deduction for unreimbursed medical expenses to the
extent that the total amount of such expenditures exceeds 7.5% of
adjusted gross income;
! a special exception to the occupancy rule for individuals who have
become mentally or physically incapable of self-care (and must enter
a nursing home) and wish to use the exclusion of capital gains upon
the sale of their former principal residence;
! the dependent care credit;
! the special tax treatment of disability benefits; and
! the deduction of employee business expenses (which are not subject
to the 2% adjusted gross income floor in the case of handicapped
workers).
Additionally, there are provisions especially designed to help businesses provide
for the needs of the handicapped. Businesses may choose from either a $15,000
deduction per year for the removal of architectural and transportation barriers or a tax
credit for public accommodations expenditures made for disabled individuals. Also
available to businesses is a provision to promote the hiring of disabled employees
under the Work Opportunity Tax Credit.
This report will be updated periodically to reflect changes in either statutory or
inflation-adjusted rates, or any changes in tax provisions that benefit the disabled.

Contents
Personal/Dependency Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Head of Household Filing Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Additional Standard Deduction for the Blind . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Medical Deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Residence in a Sanitarium or Nursing Home . . . . . . . . . . . . . . . . . . . . . . . . . 4
Special Schooling for Handicapped Dependents . . . . . . . . . . . . . . . . . . . . . . 4
Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Exclusion of Gain from Sale of Principal Residence . . . . . . . . . . . . . . . . . . . . . . . 5
Dependent Care Tax Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Tax Treatment of Disability Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Social Security and Railroad Retirement Benefits . . . . . . . . . . . . . . . . . . . . . 7
Worker’s Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Federal Employees’ Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Disability Compensation of Civil Servants . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Damages Received for Injury or Illness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Accident or Health Insurance Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Reimbursement for Medical Care Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 8
Compensation for Permanent Loss or Disfigurement . . . . . . . . . . . . . . . . . . 8
Veterans’ Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Disability Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Credit for the Elderly and the Permanently and Totally Disabled . . . . . 9
Military Disability Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Terrorist Attack Affecting Civilian Employees . . . . . . . . . . . . . . . . . . 10
Employee Business Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Removal of Architectural and Transportation Barriers . . . . . . . . . . . . . . . . . . . . 11
Tax Credit for Public Accommodations Expenditures for
Disabled Individuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Work Opportunity Tax Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
List of Tables
Table 1. Dependent Care Tax Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Federal Tax Provisions of
Interest to the Disabled
Tax provisions with special application to the disabled are briefly described in
this paper. In determining tax liability under present income tax laws, some relief is
provided to those individuals with physical and/or mental disability. Their special
needs are recognized through a number of provisions in the Internal Revenue Code.
Among the provisions available to individuals are (1) an additional standard
deduction amount for blind individuals; (2) the itemized deduction for unreimbursed
medical expenses to the extent that the total amount of such expenditures exceed
7.5% of adjusted gross income; (3) a special exception to the occupancy rule for
individuals who have become mentally or physically incapable of self-care and wish
to use the exclusion of gain from the sale of a principal residence; (4) the dependent
care credit; (5) the special tax treatment of disability benefits; and (6) employee
business expenses of handicapped workers. In addition, businesses have available
such provisions as a $15,000 deduction per year for removal of architectural and
transportation barriers or a tax credit for public accommodations expenditures made
for disabled individuals.
The Senate Finance Committee has approved the Family Opportunity Act of
2001 (S. 321). This legislation gives states the option to allow families who have
disabled children to purchase Medicaid coverage. The legislation would also allow
treatment of inpatient psychiatric hospital services for individuals under age 21 using
waivers to allow for payment of part or all of the cost of home or community-based
services. The bill in the House of Representatives (H.R. 600) has 236 co-sponsors.
It has been estimated that the bill would increase federal spending by $5.8 billion
over the next 10-year period. Budget procedures require that the bill be paid for
through either tax increases or through entitlement savings until the budget procedure
expires on September 30, 2002. Because of this, current tax provisions that provide
benefits to the disabled are being reviewed.
President Bush has signed an executive order that provides that a single Internet
site be created to provide information on all federal government services for people
with disabilities. The President has asked all federal executive departments and
agencies to provide information about their disability programs to the Department of
Labor, which has been charged with coordinating the web site’s development.

CRS-2
Personal/Dependency Exemption
Frequently, the dependency exemption arises in the case of a taxpayer
supporting a handicapped or mentally impaired individual. The dependency
exemption has a value of $3,000 for 2002. (The personal/dependency exemption is
indexed to inflation and, thus, is likely to rise in future years.)
In order to claim a dependency exemption for any person under present law, five
tests must be met.
1.
Gross income test – a taxpayer cannot claim a person (other than
the taxpayer’s child under the age of 19 or who qualifies as a
student under the age of 24) as a dependent if the person had
gross income of more than the exemption amount for the tax
year in question ($3,000 in 2002). Tax exempt income is not
included in the dependent’s gross income. Gross income is
measured before allowing for expenses of earning income or
other items deductible for income tax purposes. For example,
an individual with rental property collecting $3,200 in rent with
$1,000 in rental expenses could not be claimed as a dependent,
since his or her gross income exceeds the personal/dependency
exemption amount even though his or her adjusted gross income
is only $2,200.
2.
Support test – the taxpayer must furnish more than one-half of
the support of that person for the taxable year. Excludable
income not counted in the gross income test (such as Social
Security and railroad retirement) is counted in determining
whether the taxpayer has furnished over half of the dependent’s
support.
3.
Member of household or relationship – a person need not be
related to the taxpayer to qualify as a dependent if he or she is a
member of the taxpayer’s household and lives with him or her
for the entire year. Certain dependent relatives need not live
with the taxpayer or be a member of the taxpayer’s household to
be claimed as an exemption. Parents and grandparents, for
example, may be claimed as dependents even though they live
in separate domiciles.
4.
Citizenship test – a dependent must be a citizen or national of
the United States or a resident of the United States or a resident
of Canada, Mexico, the Panama Canal Zone, or the Republic of
Panama for some part of the year to be claimed as an exemption
by the taxpayer.
5.
Joint return test – a taxpayer is not allowed an exemption for a
dependent if the dependent files a joint tax return.

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Head of Household Filing Status
Current law provides an additional benefit for single taxpayers with a qualifying
dependent. A single taxpayer with a dependent not only receives the dependency
exemption but also moves from single taxpayer status and tax rates to “head of
household” taxpayer status and rates. Head of household rates are approximately in
the middle between the higher rates of singles and the lower rates of married
taxpayers filing jointly. Also, the standard deduction for head of household is higher
than for singles but lower than for joint returns. There is no reduction in rates or
increase in the standard deduction amount for married taxpayers who can claim a
dependent.
Additional Standard Deduction for the Blind
In addition to the personal/dependency exemption and the standard deduction,
a taxpayer is allowed an additional standard deduction1 if he/she is elderly (65 years
of age or older) or blind on the last day of the taxable year. This additional amount
is $900 for an elderly or blind married individual or surviving spouse and $1,150 for
an elderly or blind unmarried individual for tax year 2002. These additional amounts
are subject to adjustment for inflation.
For purposes of claiming this additional standard deduction, the taxpayer is
considered blind if the central visual acuity does not exceed 20/200 in the better eye
with corrective lenses, or the widest diameter of the visual field is not greater than
20 degrees. The additional standard deduction for blindness may not be claimed for
a dependent other than the spouse. An additional standard deduction for other forms
of handicap is currently not allowed by federal tax laws.
Medical Deduction
Under present law, only those unreimbursed medical expenses2 in excess of
7.5% of the adjusted gross income of the taxpayer may be deducted.3 A taxpayer
may include amounts paid on behalf of a person who qualifies as a dependent.
Additionally, he may include expenses on behalf of a person who would qualify as
a dependent except for exceeding the limit for the gross income test or except for
filing a joint return with his or her spouse. Qualified medical expenses counted
towards this 7.5% limitation include health insurance premiums, unreimbursed
1 Prior law provided an extra personal exemption for blindness. The Tax Reform Act of
1986 provided an additional standard deduction in lieu of this personal exemption. For
further information see CRS Report RS20555, The Additional Standard Tax Deduction for
the Blind: A Description and Assessment, by Louis Alan Talley.
2 A legislative history of the medical expense deduction can be obtained by ordering CRS
Report RL30833, Medical Expense Deduction: History and Rationale for Past Changes, by
Louis Alan Talley.
3 Please note that reimbursed expenses are not deductible (see page 9).

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medical expenditures, and prescription drugs. The only nonprescription drug eligible
for inclusion is insulin.
The determination of what constitutes medical care for purposes of the medical
expense deduction is of special importance to the handicapped. Three special
categories are enumerated below.
Residence in a Sanitarium or Nursing Home
If an individual is in a sanitarium or nursing home because of physical or mental
disability, and the availability of medical care is a principal reason for his being there,
the entire cost of maintenance (including meals and lodging) may be included in
medical expenses for purposes of the medical expense deduction. The Tax Court
found in W. B. Counts and Mildred P. Counts, Petitioners, v. Commissioner of
Internal Revenue, Respondent that:
In summary, the present regulations provide that the cost of inpatient
hospital care, including the costs of meals and lodging at the hospital, is an
expenditure for medical care as that term is defined in section 213(e)(1)(A). It
is recognized that such costs of maintenance at an institution other than a hospital
may constitute expenses for medical care; that whether such costs incurred at an
institution other than a hospital are deductible as medical expenses is a factual
question the answer to which depends not upon the nature of the institution but
upon the condition of the person and the care which he receives; that the cost of
nursing attention is an expense for medical care; that if a – and we note that the
regulations do not require the – principal reason for the person’s presence in an
institution is the availability of medical care for him, then the costs of meals and
lodging, furnished as a necessary incident to such care, for as long as the person
requires the care, are deductible; and that, if the availability of medical care is
not a principal reason for the person’s presence at the institution, the costs of
meals and lodging are not deemed expenses for medical care, although, even in
this event, the expenses for nursing attention are considered costs of medical care
and are deductible. An example in subdivision (v) (b) of the regulations deals
with the case of a person who resides at a home for the aged because of personal
or family considerations and not because he requires medical or nursing
attention; in this event, it is provided that the person’s costs of meals and lodging
are not embraced within the term “medical care” but that his costs of nursing
attention are deductible.4
Special Schooling for Handicapped Dependents
Payments for sending a mentally or physically handicapped dependent to a
special school may be deducted as medical expenses if the principal reason for his
or her attendance is the institution’s special resources for alleviating his or her
handicap. The cost of meals and lodging supplied by such a special school, and the
cost of ordinary education furnished that is incidental to the special services
furnished by the school, may also be included as medical expenses. Deducting the
cost of attending a school for the mentally retarded as a medical expense is expressly
allowable under I.R.S. Regulation 1.213-1(e)(1)(v)(a).
4 W. B. Counts, 42 TC 755, 763-764 (July 23, 1964).

CRS-5
Capital Expenditures
Capital expenditures incurred by a physically handicapped individual for
structural changes to his/her personal residence (made to accommodate the
handicapping condition) are fully deductible as a medical expense. The General
Explanation of the Tax Reform Act of 1986 prepared by the Joint Committee on
Taxation states that examples of qualifying expenditures are constructing entrance
and exit ramps, enlarging doorways or hallways to accommodate wheelchairs,
installomg railings and support bars, modifying kitchen cabinets and bathroom
fixtures, and adjusting the height of electric switches or outlets.
Exclusion of Gain from Sale of Principal Residence
Under present law, gain from the sale of a taxpayer’s principal residence may
be excluded from tax. The maximum exclusion is $250,000 for single taxpayers and
$500,000 in the case of married couples. The taxpayer must have used the home as
the taxpayer’s principal residence for a period totaling at least two out of the last five-
year period ending on the date of the sale. Short periods of absence, such as for
vacations, even if rented during those periods, are counted towards the two-year
period. This provision is available every two years. This provision is available to all
taxpayers regardless of age or handicapping condition.
A special exception to the occupancy rule is provided if an individual becomes
physically or mentally incapable of self-care. In such cases, the individual is deemed
to have used the residence as his/her principal residence during the time in which
he/she owns the residence but resides in a licensed care facility. This special
exception applies if the taxpayer owned and used the residence as his/her principal
residence for an aggregate period of at least one year during the preceding five-year
period before the sale.
Dependent Care Tax Credit
The dependent care tax credit is available to taxpayers for employment-related
expenses incurred to care for a dependent or spouse who is physically or mentally
disabled. Employment-related expenses include expenses for household services,
day care centers, and other similar types of noninstitutional care that are incurred in
order to permit the taxpayer to be gainfully employed. Under present law, taxpayers
may claim a nonrefundable credit of 30% of qualified expenses if their adjusted gross
income (AGI) is $10,000 or less. For taxpayers with incomes above $10,000, the
credit is reduced by 1% for each additional $2,000 of adjusted gross income until an
adjusted gross income of $28,000 is reached. Taxpayers with adjusted gross incomes
in excess of $28,000 are provided a minimum 20% credit towards qualifying
expenditures. The maximum amount of qualifying expenses is $2,400 for one

CRS-6
dependent or $4,800 for two or more dependents.5 Table 1 gives the tax credit
percentage and maximum allowable credits by adjusted gross income class for tax
year 2002. The law provides that if the dependent spends at least eight hours a day
in the taxpayer’s home, expenditures made for out of home, noninstitutional care are
eligible for the credit. Dependent care centers must be in compliance with all state
and local regulations for the taxpayer to count such expenditures toward qualified
expenses. Married couples must file a joint return in order to be eligible for the
credit.
Table 1. Dependent Care Tax Credit
Maximum Credit
Applicable
Adjusted Gross
Percentage of
Income
Qualified
One Qualifying
Two or More
Expenses
Individual
Qualifying
Individuals
Up to $10,000
30%
$720
$1,440
10,001 – 12,000
29
696
1,392
12,001 – 14,000
28
672
1,344
14,001 – 16,000
27
648
1,296
16,001 – 18,000
26
624
1,248
18,001 – 20,000
25
600
1,200
20,001 – 22,000
24
576
1,152
22,001 – 24,000
23
552
1,104
24,001 – 26,000
22
528
1,056
26,001 – 28,000
21
504
1,008
28,001 and over
20
480
960
Source: Economic Recovery Tax Act of 1981 – Law and Explanation, Commerce Clearing House, (Chicago:
1981) p. 30.
Congress increased the tax benefits available under the dependent care tax credit
when it passed the Economic Growth and Tax Relief Reconciliation Act of 2001,
P.L. 107-16. The maximum credit percentage is increased to 35%. This maximum
credit rate is reduced when the taxpayer’s AGI exceeds $15,000 (up from $10,000).
Therefore, the credit is reduced to 20% (but not below) for taxpayers whose AGI
exceeds $43,000. Further the qualified expense expenditures are increased under the
5 Before 1981, taxpayers could claim an annual credit of 20% of qualified expenses up to
$2,000 (for a maximum credit of $400) for one qualifying individual and $4,000 (for a
maximum credit of $800) for two or more qualifying individuals.

CRS-7
act from $2,400 to $3,000 for one individual and from $4,800 to $6,000 for two or
more individuals. These changes are to be effective beginning in 2003.
Tax Treatment of Disability Benefits
Social Security and Railroad Retirement Benefits
Social Security and Tier 1 Railroad Retirement Benefits received for disability
are taxable only to higher income recipients. Disability benefits are taxed in the same
manner as retirement benefits. Benefits are completely exempt if the retiree’s
“provisional income” falls below $25,000 for single taxpayers or $32,000 for married
couples filing jointly. “Provisional income” is the sum of adjusted gross income
from the tax return plus tax-exempt interest plus one-half of the taxpayer’s Social
Security or railroad retirement “Tier 1” benefits (plus certain foreign-source income,
if applicable).
If a taxpayer’s “provisional income” exceeds the threshold amounts, part of the
Social Security or railroad retirement Tier 1 benefits are included in taxable income.
If a single taxpayer’s “provisional income” is greater than $25,000 but not greater
than $34,000, the lesser of 50% of income in excess of $25,000 or 50% of Social
Security or railroad retirement Tier 1 benefits is included in income subject to tax.
For a married couple filing jointly, these rules apply to incomes between $32,000 and
$44,000. If a taxpayer’s income exceeds the upper limit ($34,000 or $44,000),
income subject to tax includes the lesser of 85% of benefits or the sum of (1) 85%
of income in excess of the upper limit plus (2) the smaller of: (a) the amount
includible under the 50% rule or (b) one-half the difference between the taxpayer’s
upper and lower thresholds ($4,500 single or $6,000 joint).
Worker’s Compensation
Worker’s compensation received by an employee because of job-related
sickness or injury is fully exempt from income tax. If the employee turns over
his/her compensation to his/her employer, and the employer continues to pay all or
part of the employee’s regular salary, any excess of the salary payments over the
amount of worker’s compensation is taxable income to the employee.
Federal Employees’ Compensation
Benefits provided for disability or death resulting from an injury sustained in the
performance of duty by civilian personnel in the service of the United States are
exempt from income tax.
Disability Compensation of Civil Servants
Disability income received by a civil servant under a federal, state, or local
governmental plan may be partially or totally excludable from taxation if such
income is in the nature of worker compensation act benefits. Such income, to qualify
for exclusion from taxation, should be from a disability incurred as a result of

CRS-8
employment and from which the employee is incapacitated–such that the employee
is no longer able to perform official duties. The disability, either mental or physical,
may be either temporary or permanent. Pensions and annuities are not covered under
this provision and only those amounts that would have been provided under
applicable workmen’s compensation acts are excludable from taxation. Thus,
income receipts that exceed worker compensation benefits are taxable to the
recipient.
Damages Received for Injury or Illness
The amount of any damages received, whether by suit or agreement, for injury
or illness (but not compensation for lost wages) is exempt from tax. A provision
included in the Small Business Job Protection Act of 1996 provides that this
exemption from taxation does not apply in the case of any punitive damages received
on account of personal injury or sickness.6
Accident or Health Insurance Benefits
Disability payments, reimbursed medical expenses, and other benefits received
under an accident or health insurance policy attributable to premiums paid by the
taxpayer are exempt from tax. Benefits other than reimbursement for medical
expenses, however, are generally taxable if they are attributable to contributions by
the employer or were paid by the employer.
Reimbursement for Medical Care Expenses
Amounts paid by an employer-financed accident and health plan to an employee
as reimbursement for medical expenses are generally exempt from tax. However,
such reimbursement may serve to reduce the medical expenses deduction because
only those expenses that are not reimbursed are allowable to the individual as a
medical expense deduction.
Compensation for Permanent Loss or Disfigurement
Compensation received for permanent loss, loss of use of a member or function
of the body, or permanent disfigurement, is exempt from tax even if received from
an employer-financed accident and health plan. Under a provision enacted as part of
the Small Business Job Protection Act of 1996, the exclusion from gross income does
not apply in the case of any punitive damages received on account of personal injury
or sickness.7
6 U.S. Congress, Joint Committee on Taxation, General Explanation of Tax Legislation
Enacted in the 104th Congress, committee print, 104th Cong., 2nd sess. (Washington: GPO,
1996), pp. 222-224.
7 Ibid.

CRS-9
Veterans’ Benefits
Disability compensation and pension payments received by veterans for service-
connected and non-service-connected disabilities are excludable from gross income.
Grants made to disabled veterans for homes designed for “wheelchair living,” and for
motor vehicles for veterans who have lost their sight or the use of their limbs, are
also not taxable.
Disability Retirement
Credit for the Elderly and the Permanently and Totally Disabled.
For persons under age 65, the credit is available only to those who are retired
on disability. The individual must be permanently and totally disabled, which is
defined as being unable to engage in any substantial gainful activity because of
physical or mental impairment that can be expected to result in death or to last for a
continuous period greater than one year.
The 15% credit is computed on the lower of the amount of disability income or
“initial amount.” The initial amount is determined by filing status. Those amounts
are as follows:
Single individual
$5,000
Married individuals, joint return, one spouse is a qualified
$5,000
individual
Married individuals, joint return, both spouses are
$7,500
qualified individuals
Married individual, separate return
$3,750
This initial amount is reduced by any tax-free benefit received under the Social
Security Act (Title II), the Railroad Retirement Act of 1974, or a Veterans
Administration program. Other amounts excludable under non-IRS Code provision
further reduce the initial amount.
Finally, the initial amount is reduced by one-half the amount of adjusted gross
income over the following levels:
Single taxpayer
$7,500
Married taxpayer, combined AGI on joint return
$10,000
Married individual filing separately
$5,000

CRS-10
Thus, this credit is targeted to low- and moderate-income taxpayers.8 As an
example, a single individual will receive no benefit if income exceeds $17,500. A
married couple, where both spouses are qualified for the credit and file a joint return,
will lose all benefit from the credit when their combined income exceeds $25,000.
Special rules apply in some cases where both taxpayers are eligible for this
credit.
Military Disability Benefits.
Prior to enactment of the Tax Reform Act of 1976, amounts received as a
pension, annuity, or similar allowance for personal injuries or sickness resulting from
active service in the armed forces of any country, as well as similar amounts received
by disabled members of the National Oceanic and Atmospheric Administration, the
Public Health Service, or the Foreign Service were excluded from income.9 The Tax
Reform Act of 1976 eliminated this exclusion prospectively for persons who join
these government services after September 24, 1975, with specific exceptions.
Disability payments administered by the Veterans Administration are excluded from
income. In addition, a person who joins the military service after September 24,
1975, and retires on disability and does not receive disability benefits from the
Veterans Administration, is allowed to exclude from income an amount equal to the
benefits he/she would be entitled to receive from the Veterans Administration.
Otherwise, members of the armed forces who joined after September 24, 1975,
are allowed to exclude military disability payments only if the payments are directly
attributable to combat-related injuries. The term “combat-related injury” means
personal injury or sickness that is incurred (1) as a direct result of armed conflict, (2)
while engaged in extra-hazardous service, (3) under conditions simulating war, or
that is (4) caused by instrumentality of war.
Terrorist Attack Affecting Civilian Employees.
A civilian employee of the United States, injured as a result of a violent attack
that the Secretary of State determines to be a terrorist act, while out of the country in
performance of his official duties, may exclude from his gross income amounts
received as disability payments attributable to those injuries.
8 Nina E. Olson, the National Taxpayer Advocate has noted that the number of taxpayers
claiming the credit has declined significantly. The credit threshold amounts have not
changed since 1983. In her FY2001 report to the Congress she recommends that the
threshold amount be adjusted for past inflation and that the credit provision should provide
for future indexing for inflation.
9 A member of the armed forces who met certain disability and length of service
requirements could elect to draw disability retirement pay based on a percentage of
disability formula or a length of service formula. Disability retirement pay based on the
percentage of disability formula was totally excluded from income. Under the length of
service formula, the portion of disability retirement pay equal to the amount that would have
been paid under the percentage of disability formula was excluded, and the excess was
subjected to the sick pay rules that existed prior to their repeal by the Tax Reform Act of
1976.

CRS-11
Employee Business Expenses
A provision enacted as part of the Tax Reform Act of 1986 provides that
employee business expenses must now be itemized along with other miscellaneous
deductions and they are subject to a floor of 2% of adjusted gross income. However,
a special exception from the 2% floor is provided for impairment-related work
expenses of handicapped employees. The Internal Revenue Code of 1986 provides
that these expenses are “for attendant care services at the individual’s place of
employment and other expenses in connection with such place of employment that
are necessary for such individual to be able to work and with respect to which a
deduction is allowable under section 162.” Section 162 of the Code is for trade and
business expenses.
Removal of Architectural and
Transportation Barriers
The removal of architectural and transportation barriers can be treated as a
deductible expense (rather than as an expenditure that is capitalized over the useful
life of the asset). Expenditures must be made to make facilities or public
transportation vehicles (either owned or leased by the taxpayer and used in the
taxpayer’s trade or business) more accessible to and usable by the elderly and
handicapped. There is no requirement that such expenditures be made only for the
benefit of employees but rather the provision applies equally to all elderly and
handicapped persons.
The maximum deduction permitted a business taxpayer (either individual,
corporation, or a controlled group of corporations) for qualifying expenditures is now
limited to $15,000 a year. The deduction was made a permanent part of the Internal
Revenue Code by the Tax Reform Act of 1986.
Tax Credit for Public Accommodations
Expenditures for Disabled Individuals
A nonrefundable tax credit is provided for expenditures made by eligible small
businesses to help comply with the requirements of the Americans With Disabilities
Act of 1990. The credit is equal to 50% of the eligible expenditures made during the
year. Eligible access expenditures must exceed $250 but expenditures greater than
$10,250 are not eligible for the credit. Thus, a maximum tax credit is available of
$5,000. This credit is included as a general business credit and subject to present law
limits. This ‘disabled access credit’ may not be carried back to tax years that ended
before the date of enactment of the Revenue Reconciliation Act of 1990.
The conferees reported that “eligible access expenditures generally include
amounts paid or incurred (1) for the purpose of removing architectural,
communication, physical, or transportation barriers which prevent a business from
being accessible to, or usable by, individuals with disabilities; (2) to provide qualified

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interpreters or other effective methods of making aurally delivered materials
available to individuals with hearing impairments; (3) to provide qualified readers,
taped texts, and other effective methods of making visually delivered materials
available to individuals with visual impairments; (4) to acquire or modify equipment
or devices for individuals with disabilities; or (5) to provide other similar services,
modifications, materials, or equipment. The expenditures must be reasonable and
necessary to accomplish these purposes.”
Additionally, small businesses are defined as those whose gross receipts did not
exceed $1 million or had no more than 30 full-time employees. Full-time employees
are those who work at least 30 hours per week for 20 or more calendar weeks during
the tax year.
Work Opportunity Tax Credit
The work opportunity tax credit is intended to promote private sector hiring of
members of specifically designated, hard-to-employ groups. The tax credit is
available to employers who hire members of eight targeted groups. Among those
included in these eight groups are vocational rehabilitation referrals (individuals with
a physical or mental disability that result in substantial handicaps to employment who
have been referred to employers upon completion of or while receiving rehabilitative
services under a state rehabilitation plan or a program approved by the Department
of Veterans Affairs). The U.S. Department of Labor reports that 5% to 7% of total
certifications have been issued to employers for hiring members of the vocational
rehabilitation group.
The current tax credit is equal to 40% of the first $6,000 of wages paid to newly
hired employees during their first year of employment when retained for at least 400
work hours. As such, the maximum credit per employee is $2,400 but may be less
dependent on the employer’s tax bracket and other criteria. The amount of the credit
reduces the company’s deduction for the employee’s wages. A lesser credit rate of
25% is provided to employers when the employee only remains on the job for 120-
399 work hours.10
10 For additional information, see CRS Report 96-356, The Work Opportunity Tax Credit:
A Fact Sheet, and CRS Report RL30089, Employment Tax Credits Expiring During the 107th
Congress, both written by Linda Levine.