If you are a parent of a special needs child, you may be eligible for dependency exemptions, tax deductible medical expenses, pre-tax savings and tax credits. One way to reduce your tax bill is to claim a dependency exemption on your tax return. In 2016, the dependency exemption is $4,050 per dependent subject to income phaseouts. Another way to reduce your tax bill is to deduct qualifying medical expenses paid for your child. All you need is for your child to qualify as a dependent for income tax purposes. The IRS (www.irs.gov) provides information to help you determine if your special needs child qualifies as a dependent.
Deductible Medical Expense FAQs
Are all medical expenses fully deductible? No, medical expenses are deductible to the extent that your medical expenses exceed 10% of your Adjusted Gross Income(AGI), which is generally equal to your taxable income. If you are age 65 or older, then the 10% floor is replaced with 7.5%.
Do medical expenses paid for by an insurance company, government agency or other fund count? No, only your out-of-pocket medical expenses qualify. However, Social Security disability payments not specifically dedicated to reimbursing your child for hospitalization and medical care does not need to reduce your medical expenses.
Can parents who become guardians when their child turns 18 treat their adult child as their dependent? Yes, as long as the adult child meets either the qualifying child or qualifying relative test.
What counts as gross income for purposes of the gross income test under the qualifying relative dependency test? Gross income includes all taxable income. Generally, most special needs children will pass the gross income test, because they are required to have less than $2,000 in assets to ensure they are not disqualified from Medicaid or Supplemental Security Income (SSI). Having less than $2,000 in assets will likely not generate more than or equal to $3,950 in gross income.
How can I maximize the tax benefit of medical expenses? Bunching medical expenses in one year helps you maximize the amount of medical expenses that are deductible and is a great way to increase your tax savings.
What are "qualifying medical expenses"? Qualifying medical expenses are those expenses incurred to diagnose, cure, mitigate or ameliorate your child’s condition (i.e. special school tuition payments, special aids costs, occupational, physical and speech therapy). Expenses that merely improve your child’s general health are not tax deductible as medical expenses.
What records do I need to keep? Keep all statements or itemized invoices supporting your medical expense deductions in the event of an income tax audit.
Pre-Tax Dollars
You can also set aside money on a pre-tax basis to pay for qualifying medical expenses. The amounts set aside are not subject to tax before they are used to pay for medical expenses and your overall income taxes are calculated based on a reduced salary amount. You can pay for medical expenses for your special needs child using pre-tax dollars via a Health Flexible Savings Account (health FSA), the Health Savings Account (HSA) and the Dependent Care Benefits (DCB).
Tax Credits
If you have more than one child, you can also take a Dependent Care Credit for any payments that you pay for special schools as long as these are costs that enable you and your spouse to work.
Trusts
A supplemental or special needs trust provides for the needs of your disabled child that are not covered by government needs-based programs. You would make a gift to the supplemental or special needs trust either while you are living or upon your passing as directed by your will to set up the trust. Then you would appoint a trustee whom you can trust to provide the needs of your special needs child and do so in a way that does not taint your special needs child's eligibility for certain government benefits such as Supplemental Security Income (SSI) and Medicaid. An alternative is to participate in a pooled trust, which is a trust managed by professional trustees and the assets are "pooled" together by various families.
Do not lose valuable tax savings by not planning and documenting your child's care. Please contact us with any questions.
Alyssa Rausch, CPA, MBA, is a tax manager at Smolin, Lupin & Co., LLC. She is a member of the New Jersey Society of CPAs. Contact her at arausch@smolin.com or at 862-881-4748. Special thanks for their insight and contribution to Connie Bonarigo, President at Navigating Autism in New Jersey, LLC, www.navigatingautismnj.com and Richard Lofredo, ChFC, CLU, Financial Advisor at Certified Financial Services, http://www.cfsllc.com/.