34.9 Reduction of the Base Amount and Liability Limitation for the Credit

The $3,750, $5,000, or $7,500 credit base amount (34.8) is reduced by nontaxable pensions and Social Security, and also by “excess” adjusted gross income, figured as follows:

Nontaxable Social Security and pensions.

The base amount is reduced by:

  • Social Security and Railroad Retirement benefits that are not taxable (34.3); and
  • Tax-free pension, annuity, or disability income paid under a law administered by the Veterans Administration (but not military disability pensions) or under other federal laws.

The base amount is not reduced by military disability pensions received for active service in the armed forces of any country, disability pensions for active service in the National Oceanic and Atmospheric Administration or Public Health Service, certain disability annuities paid under the Foreign Service Act of 1980, and workers’ compensation benefits. However, if Social Security benefits are reduced by workers’ compensation benefits, the amount of workers’ compensation benefits is treated as Social Security benefits that reduce the base.

Excess adjusted gross income.

You reduce the base amount by one-half of adjusted gross income (AGI) exceeding: $7,500 if you are single, head of household, or a qualified widow(er); $10,000 if you are married filing a joint return; or $5,000 if you are married, live apart from your spouse for the entire year, and file a separate return. Applying these income floors, the credit is no longer available to a single person when AGI reaches $17,500, $20,000 on a joint return where one spouse is eligible for the credit, $25,000 on a joint return where both spouses are eligible for the credit, and $12,500 where a married person files separately.

15% credit limited by tax liability.

After reducing the credit base amount as just discussed for nontaxable Social Security and pensions and excess AGI, the remaining credit base is multiplied by 15%. This is the maximum credit but where this amount exceeds tax liability, the credit is limited to the lesser liability, as in the following Examples.

EXAMPLES
1. John Andrews is 58 years old and single. In 2008, he retired on permanent and total disability. In 2012, he receives a taxable disability pension of $10,250, nontaxable Social Security disability benefits of $2,400, and taxable interest of $100. Adjusted gross income (AGI) is $10,350 ($10,250 + $100). His taxable income after claiming the standard deduction ($5,950) and personal exemption ($3,800) is only $600. As shown below, the credit formula would allow a credit of $176, but the credit cannot exceed John’s 2012 tax liability, which is $61 (based on taxable income of $600).
Initial base amount (34.8) $5,000
  Less: nontaxable Social Security disability   2,400
  Less: 50% of AGI over $7,500 (50% of $2,850 excess AGI ($10,350 minus $7,500))   1,425
Credit base amount  $1,175
Credit (15% of credit base amount)     $176
Tax liability limitation      $ 61
2. William Winters, age 53, retired in 2007 on permanent and total disability. In 2012, he received a taxable disability pension of $6,800 and nontaxable Social Security disability benefits of $2,300. He files a joint return with his wife, Helen, age 49, who had wages of $9,846 and a taxable disability pension of $3,000 from a job from which she retired in 2012 on account of permanent and total disability. Their adjusted gross income (AGI) for 2012 is $19,646 ($6,800 + $9,846 + $3,000). Their taxable income (after the $11,900 standard deduction and $7,600 personal exemptions) is only $146 and their tax liability is just $14. Thus, the $57 credit allowed under the credit formula is limited to $14.
Initial base amount on joint return, two eligible spouses (34.8) $7,500
  Less: Nontaxable Social Security  2,300
  Less: 50% of AGI over $10,000 (50% of $9,646 excess AGI ($19,646 − $10,000))  4,823
Credit base amount   $377
Credit (15% of credit base amount)    $57
Tax liability limitation    $14
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