Special Needs Children...And Related Tax Benefits!
06 June 2013 / Uncategorized / Comments Off on Special Needs Children...And Related Tax Benefits!
The number of children diagnosed with autism, Asperger’s syndrome, and other neurological disorders continues to skyrocket! The costs of providing care for the special needs child is a huge consideration for their parents.
The Centers for Disease Control and Prevention (CDC) have estimated as many as 1 out of 50 children born today has an autism spectrum disorder or ASD. Other disabilities are also becoming more prevalent, according to the CDC. Between 1997–1999 and 2006–2008, there was an 18.2% increase in blindness/sight impairment among children age 3 to 17, a 9.1% increase in seizures, and a 24.7% increase in “other developmental delays” (which excludes autism, attention deficit hyperactivity disorder, and learning disabilities).
Further complicating the situation, parents with special needs children are often unaware of possible tax benefits that are available and forgo hundreds, if not thousands, of dollars in potential tax deductions and credits. Among these potential tax benefits are deductions or credits for the dependency exemption, medical expenses, special instruction, capital expenditures for medically required home improvements, impairment-related work expenditures, and the earned income tax credit.
THE DEPENDENCY EXEMPTION
A taxpayer may claim a dependency exemption ($3,900 for 2013), for a “qualifying child” or a “qualifying relative.” With passage of the Working Families Tax Relief Act of 2004, P.L. 108-311 (effective 2005), the definition of a “qualifying child” and “qualifying relative” in Sec. 152(a) was amended to provide a uniform definition for purposes of the dependency exemption and for the child tax, dependent care, and earned income tax credits.
Under the definition, to be a qualifying child, in addition to meeting the relationship test, an individual must meet any one of the following requirements:
- Under the age of 19 at year end
- A student under the age of 24 at the end of the year, OR
- Totally and permanently disabled at any time during the year
An individual is permanently and totally disabled if he or she is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months. A physician must certify in writing that the individual is permanently and totally disabled.
SPECIAL SCHOOL INSTRUCTION
In general, to the extent they exceed the 10%-of-adjusted-gross-income (AGI) floor in 2013, a taxpayer can deduct qualifying medical expenses. In most cases, costs related to providing a child’s education are NOT considered medical care and, therefore, are not deductible as a medical expense. However, IRS Regulation §1.213-1(e)(1)(v) states that the unreimbursed cost of attending a “special school” for a neurologically or physically handicapped individual is deductible as a medical expense if the principal reason for sending the individual to the school is to alleviate the handicap through the school’s resources.
The expenses of a special school that are deductible as medical expenses include amounts paid for lodging, meals, transportation, and the cost of ordinary education that is incidental to the special services the school provides. Also, any costs incurred for the supervision, care, treatment, and training of a physically and/or neurologically handicapped individual are deductible if the institution provides the services.
Alternatively, taxpayers participating in tax-advantaged plans through work for funding medical expenses, such as flexible spending accounts (FSAs) or health savings accounts (HSAs), can set aside limited amounts of money to finance medical care expenses on a pretax basis, thereby avoiding the 10%-of-AGI limitation. The definition of medical care expenses for this purpose is the same as it is for the medical expense deduction. Amounts that can be set aside pretax under an HSA in 2013 are $3,250 for employees with single coverage and $6,450 for employees with family coverage. The maximum pretax contribution to a health FSA for all taxpayers is $2,500 beginning in 2013.
A special school is distinguishable from a regular school by the substantive content of its curriculum, and its status is not determined by the institution as a whole but by the nature of the services received by the individual for whom a medical care deduction is sought. The IRS considers the medical facilities and therapeutic orientation of a school as critical factors in determining whether a school qualifies for a medical care deduction.
Through case law, regulations, and rulings the IRS has recognized several types of schools that qualify as “special schools” for purposes of the medical expense deduction. These include schools that:
- Teach Braille to the blind and lip reading to the deaf;
- Train the intellectually disabled;
- Give personal daily attention to the student to improve the student’s low attention span;
- Provide an environment in which intellectually or physically handicapped students can adjust to a normal competitive classroom situation; or
- Design a special curriculum to accommodate the needs of handicapped children with IQ scores ranging from 50 to 75.
A regular school with special curricula can also be classified as a special school for those individuals benefiting from a special curriculum. For example, in IRS Revenue Ruling 70-285, a child attended a regular school that had a special curriculum for intellectually disabled children. Since the school’s special education curriculum was a severable aspect of the school’s activities, the IRS ruled that the special curriculum qualified the school as a special school with respect to the child.
In Revenue Ruling 78-340, the IRS concluded that a taxpayer whose child had severe learning disabilities caused by a neurological disorder (e.g., an ASD) could deduct as a medical expense amounts paid for tuition and related fees for the child’s education at a special school that has a program designed to “mainstream” these children so they can ultimately return to a regular school. The ruling further held that amounts paid for private tutoring by a specially trained teacher qualified to deal with severe learning disabilities are also deductible. However, the ruling stated that for the costs to be deductible, a physician must recommend both the special school and the tutoring.
In a 2005 Letter Ruling (www.irs.gov/pub/irs-wd/0521003.pdf) the IRS expanded the definition of special schooling to include tuition for programs enabling children with dyslexia to deal with their condition. The IRS determined that the children were attending the school for the principal purpose of obtaining medical care in the form of special education required for the years in which the children were diagnosed as having a medical condition that impaired their ability to learn. As a result, the IRS ruled in favor of a medical expense deduction for the tuition paid to the school.
More recently, in a 2007 Letter Ruling (www.irs.gov/pub/irs-wd/0729019.pdf) the IRS ruled that a school that provides non-academic training and support services designed to help an individual be successful in another academic or vocational school may be deemed a “special school.” The school included a student population with IQs ranging from low average to gifted and with various learning disorders and ASDs. It designed a self-contained program for the child (who had severe developmental disorders due to a medical condition) as prescribed by her neuropsychological report to enable her to compensate and overcome her diagnosed medical condition and to help her succeed in transitioning to college.
Costs of additional services provided by schools that do not otherwise qualify as special schools can also be considered deductible medical expenses if the additional services provide therapeutic value. However, while a separate payment is not required, the amount paid must be in excess of the normal tuition charged for regular students, with the premium incurred over and above normal tuition representing the qualifying medical expense. An allocation may be permitted even if the school does not distinguish between normal educational tuition and medical care in its billing.
The medical care determination does not depend on the title of the person rendering the service, the nature of the institution, or whether it is considered medical care to other individuals. Instead, the final determination depends on whether the care qualifies as medical care under IRC §213. Examples of deductible medical expenses include the additional cost incurred for special programs assisting psychologically, physically, or neurologically impaired students; note takers for deaf students; or psychotherapy services to assist students in adjusting to a normal school.
CAPITAL EXPENDITURES
As a general rule, capital expenditures are NOT permitted as a medical expense deduction. However, a medical expense deduction is available when the capital expenditure is made primarily for medical care. To secure a current medical expense deduction for a capital expenditure, the cost must be reasonable in amount and incurred out of medical necessity primarily for use by the individual requiring medical care.
Qualifying capital expenditures for medical expense deductions fall into two categories:
- Expenditures improving the taxpayer’s residence while also providing medical care.
- Expenditures removing structural barriers in the home of an individual with physical limitations.
Capital expenditures in the first category are deductible only to the extent that the cost exceeds the increase in the property’s fair market value as a result of the capital expenditure. For example, after a physician recommends installing an elevator for an individual suffering from a chronic and disabling arthritic condition limiting the individual’s mobility, an elevator costing $15,000 is installed in the taxpayer’s home. As a result of the expenditure, the home increases in value by $10,000. Therefore, $5,000 may be deducted as a medical expense. Expenditures incurred in the second category are fully deductible under the presumption that there is no increase in the property’s value as a result of removing a physical barrier.
Under either category, costs incurred to operate or maintain the capital expenditure (such as increased utility and maintenance costs to operate the elevator) are deductible currently as medical expenses as long as the medical reason for the expenditures continues to exist.
CONFERENCES AND SEMINARS
Parents and guardians of special needs children often attend medical conferences and seminars to learn more about their child’s disability. Under Revenue Ruling 2000-24, amounts paid for the registration fees and travel expenses are deductible as medical expenses if the costs are primarily for and essential to the dependent’s medical care.
Parents should obtain a recommendation from their child’s doctor to ensure the medical deduction is not disallowed. The conference or seminar must deal specifically with the medical condition the child has, not just general health and well-being issues. Moreover, the ruling does not permit deductions for meals and/or lodging costs incurred while attending the conference.
IMPAIRMENT-RELATED WORK EXPENDITURES
As special needs individuals mature and enter the workplace, many are entitled to claim itemized deductions for their unreimbursed impairment-related work expenses under IRS §67(d).
Impairment-related work expenses refer to expenses that a handicapped individual incurs for attendant care services at the place of employment enabling the individual to maintain employment, and that qualify as trade or business expenses.
Handicapped individuals for this purpose are defined as those having a physical or mental disability that is a functional limitation to employment or a physical or mental impairment (including but not limited to impaired sight or hearing) that substantially limits one or more major life activities, such as performing manual tasks, walking, speaking, breathing, learning, or working.
According to the IRS Publication 502 (www.irs.gov/pub/irs-pdf/p502.pdf) an employee should include impairment-related work expenses on Form 2106, Employee Business Expenses. These expenditures are then transferred to Form 1040’s Schedule A, Itemized Deductions, as an unreimbursed business expenses and are NOT subject to the 2%-of-AGI limitation on miscellaneous itemized deductions.
EARNED INCOME TAX CREDIT
The idea behind the earned income tax credit (EITC) is to encourage the economically disadvantaged to work by partially offsetting the Social Security taxes on wages. The income threshold varies depending on filing status and number of children, but as an example, families with AGI in 2013 under $48,378 who file a married joint return and have two qualifying children may qualify for the EITC, which is a refundable credit.
For EITC purposes, a “qualifying child” has the same definition as discussed above, thus, a severely disabled child is a “qualifying child” regardless of age, even into adulthood, as long as the child continues to live with his or her parent(s) or another person who meets the relationship test with respect to the child. The maximum EITC for 2013 is $6,044 for families with three or more qualifying children.
CONCLUSION
The number of individuals with special needs is escalating at unprecedented rates. Some experts argue that this may simply be a matter of better recognition of special needs, as changes in autism diagnostic criteria have evolved over the years. Now, autism is the sixth most commonly classified disability in the United States. Whether due to diagnostic changes or not, these increased numbers are affecting state and local government programs as they face shortfalls because of increasing demand for services, forcing parents to absorb more of their children’s medical care and other related expenses.
This article provided a brief overview of some of the more common deductions and credits that may be available under current tax law. However, it’s important to keep in mind that specific rules apply to each benefit and the determination of whether a benefit applies is often fact-specific. For example, to claim a child’s educational expenses as medical expense deductions when the child attends facilities that are primarily educational and not special schools, the particular services provided to the child must be considered. Similarly, deductions for medical conference expenses are case-specific. Even the EITC has multiple requirements and limitations.