Tax Strategies for Parents of Kids with Special Needs

By Regina M. Levy, CPA

Schwab Learning estimates that 15-30 percent of families with a special needs child have one or more unclaimed tax benefits. Are you one of these families???

Many parents don’t realize that Learning Disabilities are considered a medical condition, as are other disabilities such as autism, cerebral palsy, ADHD, etc. [Rev. ruling 78-340, 1978-2 C.C. 124]

Medical expenses are limited by 7.5% of Adjusted Gross Income, but some of the following out-of-pocket costs may cause you to exceed that limitation. Costs that can be deducted include:

• Special Schooling including tuition or tutoring by someone especially trained to meet the child’s needs. The purpose and primarily reason for the choice of school must be to alleviate or remediate the disability.
• Regular education when the purpose is to treat the disability and the school – such as typical preschool for socialization purposes.
• Aides required for a child to benefit from regular or special education.
• Special instruction, training or therapy such as OT, Speech, remedial reading, etc.
• Diagnostic evaluations by qualified personnel.
• Exercise program if recommended by qualified medical personnel to treat a specific condition, includes yoga, dance, horseback riding, etc.
• Transportation: Mileage to and from special schools or therapy sessions at the medical mileage rate of 20 cents per mile. Also parking fees. Airfare for parents and child to obtain treatment or testing.
• Diapers – if related to a medical condition, such as autism.
• Equipment or devices used primarily for the alleviation of a person’s illness – examples would be specially designed bedding, car seats, etc. Rev Ruling 76-80.
• Home Improvements – costs are deductible to the extent they exceed any increase in the home’s fair market value [Reg. 1.213-1(e) (1) (iii)]. Certain improvements (e.g., altering the location of or otherwise modifying electrical outlets and fixtures are deemed to have no affect on the home’s fair market value and thus, the full cost can be claimed as a medical expense [Rev. Rul. 87-106, 1987-2 CB 67].
• Lead Paint Removal – The cost of removing the paint can be deductible if the child has lead poisoning from the paint. Lead poisoning can resemble and complicate other conditions, such as autism.
• Parents’ attendance at a disability related conference. This good news came in May 2000, in IRS Revenue Ruling 2000-24. Parents who attend conferences primarily to obtain medical information concerning treatment for and care of their child may include the following admission and transpiration costs. Related books and materials are deductable. Attendance is considered to be primarily for and essential to the care of the dependant if:
  • Attendance at the conference has been recommended by a medical provider treating the child. AND
  • The conference provides medical information concerning the child’s condition – specific issues not just general wellbeing. AND
  • The primary purpose of the visit is to attend the conference.
  • BUT … Costs of food and lodging are generally NOT deductible. Lodging can be if you are staying in a hotel while your child receives medical attention in a hospital or related setting. Then lodging is limited to $50 per day. Meals are not deductible.

Many people do not realize that the additional costs of following a medical diet such as the gluten-free, casein-free diet can also be considered medical expenses. Citations supporting this deduction include:

• Revenue Ruling 55-261
• Cohen 38 TC 387
• Revenue Ruling 76-80, 67 TC 481
• Flemming TC MEMO 1980 583
• Van Kalb TC MEMO 1978 366

Limitations – only the extra cost of the gluten-free product over what you would pay for the similar item at a grocery store. Here is an example of a GFCF Diet Deductible Worksheet. You can also claim mileage expense for the trip to the health food store and postal costs on gluten-free products ordered by mail.

Specific products used only in a gluten-free home such as xanthan gum are 100% deductible.

You should save all cash register tapes, receipts, and canceled checks to substantiate your gluten-free and or casein-free purchases. You will need to prepare a list of grocery store prices to arrive at the differences in costs. You need not submit it with your return, but do retain it.

Very Important – Attach a letter from your doctor to your tax return. This letter should state that your child suffers from a medical condition (autism, celiac, etc.) and must follow a total gluten-free, casein-free diet for life.

Legal expenses incident to medical care have been allowed as a medical expense deduction only when the legal expenses are “necessary to legitimate a method of medical treatment ” Levine v. Commissioner [83-1 USTC ¶9101] Lenn v. Commisioner.

This means that attendance at IEP meetings is not a deductable legal or medical expense. However, if you have to engage a lawyer to enforce an IEP or IFSP, that may be deductable. Especially if you are suing the school to hire appropriate personnel.

Suing the school district for reimbursement is also not deductable.

Subsequent Reimbursement
If you anticipate reimbursement from a school district or insurance company for any of these costs, that reimbursement will be includable as income when received if the deductions are taken. That could raise your AGI in the subsequent year causing you to lose other deductions.

401K/IRA Funds
Medical expense, it can also be used to justify a “hardship” withdrawal from a 401(k) retirement plan [Reg. 1.401(k (-1(d) (3) (iii) (B)]. This would allow parents to use their 401(k) funds to pay special education expenses. The amount not subject to the additional 10% tax penalty is the amount over 7.5% of AGI. Regular tax must be paid on all IRA/401K withdrawals.

Cafeteria Plans
If your employer offers a cafeteria plan, you can use the funds in that account to pay for treatments for your child. All the items noted above under medical expenses (schooling, tutoring, therapy, conferences, etc) may be paid out of such an account. Tax-wise this is the most advantageous option as you are paying for these items with pre-tax dollars and are not subject to the 7.5% limitation. If plans have a forfeit clause, prepay for next year in December.

Even better than deductions, credits reduce $ for $ the amount of tax owed.

Child and Dependent Care Credit

Covers work related expenses for dependents of taxpayer. Dependent must be under the age of 13. BUT if the child requires supervision due to a disability, the age limit no longer applies. A dependent is considered to be physically or mentally incapable of self-care if the dependent is incapable of caring for his or her hygienic or nutritional needs, or requires full-time attention of another person for his or her own safety or the safety of others [Reg 1.44A-1(b)(4)].

Covered expenses – up to $3,000 per year per dependent are allowed, max for all dependents is $6,000. Amount does not need to be equal among children. Regular childcare, after-school programs (including classes) and day camp all qualify. Sleep-away camps do not. Credit is calculated at 20-35 percent of expenses, based on AGI. (Over $43k it is 20%; the maximum credit per dependent is $600 for one child, $1,200 for 2 or more).

Planning strategy – use the first $3000-$5999 of special schooling costs to claim this credit; any remaining costs can be deducted as medical expenses. At least $1 must be for the other child to claim more than $3000.

Families with AGIs under $39,783 may qualify for EIC depending on number of children and filing status. EIC is normally limited to children under age 19. If the child is 19-23 and a full-time student, then he or she also qualifies. As long as a severely disabled child lives with his or her parent, there is no age limit for EIC.

Tuition

American Opportunity Credit (replaced HOPE Credit) – for 2009 & 2010 ; up to 40% refundable.  It is up to $2,500 per student, per year for first 4 years of post-secondary education.  The student must be pursuing an undergraduate degree or other recognized educational credential, enrolled more than 1/2 time, and have no felony drug convictions.

Limitations based on AGI –these benefits begin to phase out for higher income taxpayers at the lower number and are eliminated when AGI reaches the upper number.

American Opportunity Credit                     $160,000 – $180,000

Lifetime Learning                                          $100,000 – $120,000

Tuition & Fees Deduction                            $160,000

Lifetime Learning Credit

Up to $2000 per return, all years of post-secondary education and coursed to acquire or improve job skills, unlimited number of years, no degree required, one or more courses, felony drug conviction rule does not apply. 20% of first $10,000 = $2,000

Educational Expenses

Educational expenses may also be taken as a deduction. Tax return preparation programs generally maximize either credit or deduction.

• $4,000 – AGI < $130,000
• $2,000 – AGI < $160,000
• None if AGI > $160,000

Books, Supplies, Room and Board

May be paid for out of Education Savings Accounts (509 Plans), or IRA/401K distributions (no 10% penalty). Thus it is generally better to use the 509 plan money to pay for these expenses first then tuition if the 509 plan does not have enough funds.

Limitations: HOPE and Lifetime Learning credits phase out when AGI is over $114,000. Tuition deductions phase out when AGI is over $160,000. If Married Filing Separately, neither the education credits nor tuition and fees deductions apply.

If you are self employed and can also employ your spouse, then by implementing a Section 105 HRA Medical Reimbursement Plan. You can deduct 100% of your family health insurance premiums, as well as uninsured medical, dental and vision care expenses, employee disability insurance, and term insurance premiums. This plan is managed by TASC, they offer an audit guarantee, and TASC will cover audit penalties and interest if you are audited. The fee is $395 per year; I do represent them and do earn a small premium if you buy a plan (full disclosure).

If you are a parent provider of respite care, you may receive a 1099 from the Regional Center. Attach a statement to your return showing the amount received, and the amounts paid to others, include any net amount on line 21 (other income) of your form 1040. If you paid more than $600 to any other provider, you should provide them with a 1099.

About Regina Levy, C.P.A.

Gina has been a Certified Public Accountant for over 20 years. Her experience includes over 5 years with a major international CPA firm and several years managing accounting departments. Recently she opened her own CPA practice in West Los Angeles. Gina is also the mother of two children with special needs. Her daughter has autism and her son has ADHD. She has been a passionate advocate for increasing the quality of service for all children with special needs. Along with her husband, Ralph, and other parents, she founded SpecialKidsLA, Inc. The website was a great help to many parents, unfortunately, they were unable to secure adequate funding to continue managing and hosting the website. Gina now brings this passion to her prior background of tax and accounting. She has recognized that many parents of children with special needs are unaware of how they can access additional services by tax planning. She is available for consultation on any of these issues and looks forward to helping parents.

This information is for educational purposes only and is not considered tax advice.  Please consult your personal tax advisor.