Permanently and Totally Disabled: IRS Test, Credits, and EITC

The IRS treats you as permanently and totally disabled when a doctor certifies that a physical or mental impairment keeps you from doing any substantial gainful work, and that impairment has lasted, is expected to last, at least 12 continuous months, or is expected to result in death.¹ Meeting this IRS definition of permanently and totally disabled is what unlocks a specific credit, waives the 10% penalty on early retirement withdrawals, extends the Earned Income Tax Credit to older disabled children, and preserves a deduction for job-related expenses. A Social Security or VA disability rating does not automatically satisfy the IRS standard, so knowing exactly what the tax code requires is where the money is.

The Two-Part Test

The definition lives in Internal Revenue Code Section 22(e)(3), and both parts have to be true. You cannot engage in any “substantial gainful activity” because of a physical or mental impairment, and that impairment either has lasted or is expected to last continuously for at least 12 months, or is expected to result in death.¹ A severe condition that sidelines you for 11 months and resolves does not qualify.

“Substantial gainful activity” means work performed for pay or profit. The Social Security Administration sets a monthly earnings threshold used to measure it, which is $1,690 per month in 2026 for individuals who are not blind.² The IRS borrows the concept rather than publishing its own figure. Earnings above that level make it unlikely the IRS will accept that you cannot perform substantial work.

If you are looking at the early-distribution penalty exception under Section 72 rather than the credit under Section 22, the wording is slightly different: Section 72(m)(7) refers to a disability of “long-continued and indefinite duration” instead of a specific 12-month period.³ The tests point in the same direction in practice, and the 12-month bright line is what most taxpayers meet first.

What the Physician’s Statement Has to Say

You need a signed statement from a physician confirming you meet the IRS test. It must say you cannot engage in substantial gainful activity and must address duration: either the condition has lasted or is expected to last continuously for at least a year, or there is no reasonable probability it will ever improve.⁴ The physician also records the date the impairment began, which sets when your tax benefits start.

For the Credit for the Elderly or Disabled, the certification goes in Part II of Schedule R (Form 1040). The physician signs one of two lines: line A if the disability has lasted or is expected to last at least a year, or line B if there is no reasonable probability the condition will improve. You do not mail the statement with your return. Keep it in your records in case the IRS asks.

Usually one certification is enough. If your physician signed line B, or you filed a physician’s statement for 1983 or earlier, you do not need a fresh one each year.⁴ You still confirm annually that you were permanently and totally disabled during the tax year and unable to engage in substantial work, but the original medical statement carries forward.

Veterans have an alternative. If the Department of Veterans Affairs certifies you as permanently and totally disabled, VA Form 21-0172, signed by a person authorized by the VA, substitutes for a physician’s statement.⁴ Outside that specific form, the IRS does not automatically accept a Social Security disability approval or another agency’s determination as meeting its standard.

Credit for the Elderly or Disabled

The most direct benefit tied to permanent and total disability status is the Credit for the Elderly or Disabled, calculated on Schedule R. You qualify if you are 65 or older, or if you are under 65, retired on permanent and total disability, and received taxable disability income during the year.¹ That last requirement catches people out: if you are under 65 and had no taxable disability income, you cannot claim this credit, valid physician’s certification notwithstanding.

Calculating the Credit

The credit begins with an initial dollar amount based on your filing status:

Single filer, or joint return with one qualifying spouse: $5,000
Joint return where both spouses qualify: $7,500
Married filing separately: $3,750

For taxpayers under 65, the initial amount cannot exceed the taxable disability income actually received during the year. If both spouses on a joint return are under 65 and qualify, the cap is their combined disability income.¹

Two reductions then shrink the initial amount. First, subtract any nontaxable Social Security, railroad retirement, or other nontaxable pension benefits you received. Second, if your adjusted gross income exceeds a threshold ($7,500 single, $10,000 joint, $5,000 married filing separately), subtract half the excess. The credit equals 15% of what remains.¹

This is nonrefundable, so it can zero out your tax bill but will not generate a refund on its own. Because of the reductions, the credit mostly reaches low-to-moderate-income filers. A single filer with AGI over roughly $17,500 and nontaxable Social Security typically sees the credit disappear entirely.

The 10% Early Retirement Withdrawal Penalty

Withdrawals from an IRA, 401(k), or other qualified plan before age 59½ normally carry a 10% additional tax on top of ordinary income tax. If you are totally and permanently disabled within the meaning of Section 72(m)(7), that 10% does not apply.³ The exception covers both employer plans and IRAs, and you do not have to separate from your employer first.⁵

File Form 5329 with your return and enter exception number 03 on line 2.⁶ Keep your physician’s certification in your records; the IRS can request it during an audit, and without it the penalty comes back with interest. The withdrawal itself is still taxed as ordinary income. Only the 10% add-on is removed.

How Disability Payments Are Taxed

Different disability payments get very different treatment.

Payments under a disability retirement plan your employer funded count as taxable wages until you reach minimum retirement age, which is the earliest age you could have received a regular pension had you not been disabled. Report them on line 1h of Form 1040. Beginning the day after minimum retirement age, the same payments become pension income and move to lines 5a and 5b.⁷ This split matters for the Credit for the Elderly or Disabled: only taxable disability income received before minimum retirement age counts toward the initial-amount cap for filers under 65.

Several types of disability payments are excluded from gross income entirely: VA disability compensation and pension payments; workers’ compensation for occupational injury or illness; disability payments for lost income under a no-fault auto insurance policy; and amounts received under long-term care insurance contracts. These nontaxable payments still matter indirectly, because nontaxable Social Security disability benefits and nontaxable pensions reduce the initial amount when calculating the Credit for the Elderly or Disabled.⁷

EITC When You Have a Disabled Child

Permanent and total disability status also matters for the Earned Income Tax Credit. A qualifying child normally has to be under 19, or under 24 if a full-time student. That age limit disappears entirely if the child has a permanent and total disability and a valid Social Security number.⁸ An adult child of any age who lives with you and meets the other qualifying-child rules can count.

The EITC uses the same disability standard: the person cannot engage in substantial gainful activity because of a physical or mental condition, and a doctor has determined the condition has lasted, will last at least a year, or could result in death. Sheltered employment, where a person with a disability works for minimal pay under a special program, does not count as substantial gainful activity.⁸ The EITC is refundable, which makes it far more valuable than the elderly/disabled credit for families who qualify.

ABLE Accounts

ABLE (Achieving a Better Life Experience) accounts are tax-advantaged savings accounts for people with disabilities. Contributions are not deductible, but the money grows tax-free and distributions are tax-free when used for qualified disability expenses such as housing, education, transportation, and health care.⁹

In 2026, total annual contributions from all sources cannot exceed $19,000, which matches the annual gift tax exclusion.¹⁰ A working beneficiary may be able to add more, up to the lesser of the federal poverty level for a one-person household or annual compensation, if certain retirement plan contributions were not made on their behalf that year.

To open an ABLE account, the qualifying disability must have begun before age 26. You do not have to meet the IRS permanent-and-total standard specifically. Receiving SSI or SSDI, or holding a separate disability certification, can also qualify you.

Impairment-Related Work Expenses

If you have a disability that limits your employment or substantially limits a major life activity, you can deduct expenses necessary for you to work, including attendant care at your workplace and other job-site costs tied to your disability.¹¹ This is a real benefit because most unreimbursed employee expenses are no longer deductible under current law. Impairment-related work expenses are an exception. Employees use Form 2106 and report the impairment-related portion on Schedule A. Self-employed filers report them on the schedule used for their business income, such as Schedule C.

Claiming Missed Benefits From Prior Years

If you just received a physician’s certification but were disabled in earlier years, you can amend past returns. File Form 1040-X within three years after the date you filed the original return, or within two years after the date you paid the tax, whichever is later.¹² This works for both the Credit for the Elderly or Disabled and a refund of the 10% early-distribution penalty you paid in a year when you actually met the disability definition.

If the IRS Challenges Your Claim

The IRS can request your physician’s statement at any time, and claims without documentation get denied. If a credit or exception is disallowed, you owe the original tax plus interest. An accuracy-related penalty of 20% of the underpaid tax can also apply if the IRS finds you were negligent or claimed a credit you did not qualify for.¹³ Interest accrues on the tax and the penalty both.

You can have the penalty removed by showing reasonable cause and good faith. A borderline physician’s statement is a far stronger position than no documentation at all. Get the certification before you file, not after.

1
Office of the Law Revision Counsel. 26 USC 22 – Credit for the Elderly and the Permanently and Totally Disabled
2
Social Security Administration. What’s New in 2026
3
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
4
Internal Revenue Service. Instructions for Schedule R (Form 1040)
5
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
6
Internal Revenue Service. Instructions for Form 5329
7
Internal Revenue Service. Publication 907 – Tax Highlights for Persons With Disabilities
8
Internal Revenue Service. Disability and the Earned Income Tax Credit (EITC)
9
Internal Revenue Service. ABLE Accounts – Tax Benefit for People With Disabilities
10
Social Security Administration. Spotlight on Achieving a Better Life Experience (ABLE) Accounts
11
Internal Revenue Service. Publication 529 – Miscellaneous Deductions
12
Internal Revenue Service. Topic No. 308 – Amended Returns
13
Internal Revenue Service. Accuracy-Related Penalty