Part III Rules for Disability Retirement and
Credit for the Elderly or the Disabled

This part of the publication is for federal employees and retirees who receive disability benefits under the CSRS, the FERS, or other federal programs. It also explains the tax credit available to certain taxpayers because of age or disability.

Disability Annuity

If you retired on disability, the disability annuity you receive from the CSRS or FERS is taxable as wages until you reach minimum retirement age. Beginning on the day after you reach minimum retirement age, your payments are treated as a retirement annuity. At that time or at any time thereafter, you can begin to recover the cost of your annuity under the rules discussed in Part II.

If you find that you could have started your recovery in an earlier year for which you have already filed a return, you can elect to start your recovery of contributions in that earlier year by filing an amended return for that year and each succeeding year. Generally, an amended return for any year must be filed within 3 years after the due date for filing your original return for that year.

Minimum retirement age (MRA). This is the age at which you could first receive an annuity were you not disabled. This is generally based on your age and length of service.

Retirement under the Civil Service Retirement System (CSRS). In most cases, under the CSRS, the minimum combinations of age and service for retirement are:

• Age 55 with 30 years of service,
• Age 60 with 20 years of service,
• Age 62 with 5 years of service, and
• For law enforcement, firefighter, or air traffic controller service, age 50 with 20 years of covered service.

Retirement under the Federal Employees Retirement System (FERS). Your MRA under the FERS is between ages 55 and 57 with at least 10 years of service. With at least 5 years of service, your MRA cannot be older than age 62. Specifically, your MRA with at least 10 years of service is shown in the following table.

MRA table

How to report. You must report all your disability annuity payments received before minimum retirement age on line 7 (Form 1040 or Form 1040A).

Withholding. For income tax withholding purposes, a disability annuity is treated the same as a nondisability annuity. This treatment also applies to disability payments received before minimum retirement age when these payments are shown as wages on your return. See Tax Withholding and Estimated Tax in Part I, earlier.

Other Benefits

The tax treatment of certain other benefits is explained in this section.

Federal Employees' Compensation Act (FECA). FECA payments you receive for personal injuries or sickness resulting from the performance of your duties are like workers' compensation. They are tax exempt and are not treated as disability income or annuities. However, payments you receive while your claim is being processed, including pay while on sick leave and "continuation of pay" for up to 45 days, are taxable.

Sick pay or disability payments repaid. If you repay sick leave or disability annuity payments you received in an earlier year to be eligible for nontaxable FECA benefits, you can deduct the amount you repay. You can claim the deduction whether you repay the amount yourself or have the FECA payment sent directly to your employing agency or the OPM.

Claim the deduction on Schedule A (Form 1040) as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit. It is considered a business loss and may create a net operating loss if your deductions for the year are more than your income for the year. Get Publication 536, Net Operating Losses, for more information. The repayment is not eligible for the special tax credit that applies to repayments over $3,000 of amounts received under a claim of right.

If you repay sick leave or disability annuity payments in the same year you receive them, the repayment reduces the taxable sick pay or disability annuity you include in income. Do not deduct it separately.

Terrorist attack. Disability benefits you receive for injuries resulting from a violent attack are tax exempt and are not treated as disability income or annuities if:

1. The attack took place while you were a federal employee performing official duties outside the United States, and
2. The Secretary of State determines it to have been a terrorist attack.

Disability resulting from military service injuries. If you received tax-exempt benefits from the Department of Veterans Affairs for personal injuries resulting from active service in the armed forces and later receive a CSRS or FERS disability annuity for disability arising from the same injuries, you cannot treat the disability annuity payments as tax-exempt income. They are subject to the rules described earlier under Disability Annuity.

Payment for unused annual leave. When you retire, any payment for your unused annual leave is taxed as wages in the tax year you receive the payment.

Credit for the Elderly or the Disabled

You can take the credit for the elderly or the disabled if:

1. You are a qualified individual, and
2. Your income is not more than certain limits.

You are a qualified individual for this credit if you are a U.S. citizen or resident and, at the end of the tax year, you are:

1. Age 65 or older, or
2. Under age 65 and retired on permanent and total disability, and you--
   1. Received taxable disability income, and
   2. Did not reach mandatory retirement age (explained later) before the tax year.

You are retired on permanent and total disability if you were permanently and totally disabled when you retired, and you retired on disability before the close of the tax year. If you retired on disability before 1977 but you were not permanently and totally disabled at the time you retired, you can qualify for the credit if you were permanently and totally disabled on January 1, 1976, or January 1, 1977.

Permanently and totally disabled. You are permanently and totally disabled if you cannot engage in any substantial gainful activity because of your physical or mental condition. A physician must certify that your condition is expected to result in death or has lasted, or can be expected to last, continuously for 12 months or more. Substantial gainful activity is the performance of significant duties over a reasonable period of time while working for pay or profit, or in work generally done for pay or profit.

Mandatory retirement age. This is the age set by your employer at which you would have had to retire if you had not become disabled. There is no mandatory retirement age for most federal employees. However, there is a mandatory retirement age for the following employees.

1. An air traffic controller appointed after May 15, 1972, by the Department of Transportation or the Department of Defense generally must retire by the last day of the month in which he or she reaches age 56.
2. A firefighter employed by the U.S. Government who is otherwise eligible for immediate retirement generally must retire by the last day of the month in which he or she reaches age 55 or, if later, completes 20 years of firefighter service.
3. A law enforcement officer employed by the U.S. Government who is otherwise eligible for immediate retirement generally must retire by the last day of the month in which he or she reaches age 57 or, if later, completes 20 years of law enforcement service.

Physician's statement. If you are under 65, you must have your physician complete a statement certifying that you are permanently and totally disabled. You must keep this statement for your tax records. You can use the Physician's Statement in the instructions for either Schedule R (Form 1040) or Schedule 3 (Form 1040A).

Figuring the credit. If you figure the credit yourself, fill out the front of either Schedule R (if you are filing Form 1040) or Schedule 3 (if you are filing Form 1040A). Next fill out Part III of either Schedule R or Schedule 3.

If you want the Internal Revenue Service to figure your tax and credits, including the credit for the elderly or the disabled, see Publication 967, The IRS Will Figure Your Tax, and the instructions for Schedule R (Form 1040) or Schedule 3 (Form 1040A).

More information. For detailed information about this credit, get Publication 524.

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