Tax Strategies for Special Needs Families

Outlined below are a few of the main areas to focus on when assessing your tax situation. A tax adviser who is familiar with special needs planning is an important person to have on your financial team. This tax professional can help to ensure you’re taking advantage of all the tax deductions and credits that you are eligible for and that you maintain them in the future.

Medical Expenses

Many special needs families have medical expenses that exceed those of a typical taxpayer. For the 2024 tax year, if you itemize your deductions, you may be able to deduct medical expenses for you, your spouse and your dependents to the extent those expenses exceed 7.5% of your Adjusted Gross Income (AGI) and are not compensated by insurance or reimbursed under a Health Savings Account (HSA), Flexible Saving Account (FSA) or like account.[1]

Examples of deductible medical expenses are: doctors’ fees, prescription drugs, over the counter insulin and/or syringes, dental costs, psychological or psychiatric services, premiums paid for Medicare Part B, and the cost of guide dogs, wheelchairs, etc. Keep in mind that you may be able deduct expenses for general health and wellness, such as nonprescribed medicines, drugs, vitamins, or health foods for a person with a disability if you have a doctor’s written note.

There are additional medical expenses that are deductible and are often overlooked. These include costs related to special schools and institutions, camps, capital expenditures, medical conferences and seminars, nursing home expenses and long-term care (LTC) costs, and medical travel and transportation.

• Special schools and institutions: If your child/dependent attends a qualifying special school, you may deduct the entire unreimbursed cost as a medical expense. In addition to tuition, the costs can include lodging, meals, transportation, incidental education costs, supervision at the school, treatment, and training. Private tutoring expenses and summer camp costs may also qualify.
• Capital expenditures: If a physician recommends that a capital improvement should be made to your home for medical reasons, you may deduct the cost in excess of the increase in your home’s fair market value (FMV). If the recommendation is to remove structural barriers, the full cost may be deductible. An example is installing a lift for someone with a physical limitation. The full cost of the lift and installation may be deductible. The ongoing costs to maintain it may also be deductible in subsequent years, if a medical reason still exists.
• Medical conferences and seminars: If your doctor recommends that you attend sessions to learn more about your child/dependent’s medical condition in order to assist them, the cost of attending these conferences and seminars, including transportation, is deductible.
• Medical travel and transportation: The cost of travel to and from a medical facility, not including trips to improve general health, is deductible. If you use your own personal automobile, you may deduct a certain amount based on miles traveled. If an overnight stay is required, a portion of lodging costs for a medical facility for you and one other person may be deductible. Travel to and from a summer camp for a child/dependent with special needs may also be deductible.
• Nursing home and long-term care: Expenses incurred in a nursing home or long-term care facility are deductible if you or your dependent are chronically ill, or the facility is primarily for medical care. In most cases, facilities primarily provide custodial care. The medical care component specifically may be deductible if separately stated on the bill. You may also deduct a portion of the cost of LTC insurance premiums.

It is important to be diligent in tracking your medical expenses, obtaining documentation of physician recommended expenses, and planning ahead with your tax adviser. For a more extensive list of deductible medical expenses, visit the IRS website.

Tracking medical expenses can seem like a full-time job. There are resources and services available to assist, including apps and websites that are “IRS friendly”. For example, you can track your miles, medical expenses, and charitable contributions and, when tax time comes around, print a report that can be used with your filing. Some options include: MileIQ, Driversnote, and Mileagewise. There are also Certified Daily Money Managers who have expertise and experience working with families of those living with a disability. They help with daily bills, medical insurance management, tracking expenses, and more. The American Association of Daily Money Managers (AADMM) provides options for finding a professional in this space, including state agencies and non-profits who provide pro-bono or reduced fee services to elderly, disabled, or others with limited financial means.

You should also consider a Health Savings Account (HSA) or Flexible Saving Account (FSA) to set aside pre-tax money to directly lower your taxable income and to cover medical expenses throughout the year. Note that unlike an HSA account where the funds can rollover year to year, typically the full account balance of an FSA must be used by year-end.

Impairment Related Work Expenses (IRWEs)

You may also claim a deduction for unreimbursed employee expenses for you or your dependent as an employee with impairment-related work expenses (IRWEs). IRWEs are expenses that are necessary for you or your dependent with special needs to be able to work. Examples include attendant care services required to prepare for work or while at work, a reader if you/your dependent is blind, transportation costs, service animals, medical devices, medication, or other expenses needed in order to work satisfactorily. This deduction is considered a business deduction and is not subject to the 2% AGI limitation on miscellaneous deductions.[2]

Retirement Plan and IRA Distributions

If you/your dependent withdraws from a qualified retirement plan or Individual Retirement Account (IRA) before age 59 1/2, those distributions are subject to a 10% penalty. A penalty waiver may apply, if a plan participant meets the definition of disability from the Social Security Administration and is receiving Social Security Disability Insurance (SSDI). There are also withdrawal options available related to adoption of a child with special needs.

A penalty waiver may also apply if a participant has substantial medical expenses. If distributions are used for medical care, the penalty is waived on amounts less than or equal to the allowable medical expense deduction (> 7.5% of AGI). This holds true whether you are eligible to itemize your deductions or not. Before withdrawing from a retirement plan, you should speak with your tax adviser and financial planner to determine the best strategy.

Refundable, Partially Refundable and Nonrefundable Tax Credits

Refundable

A refundable tax credit is a credit you can get as a refund even if you don’t owe any tax. The Earned Income Tax Credit (EITC)[3] is a refundable tax credit aimed at assisting low-to-moderate-income workers and families. The credit is typically available to individuals who earn income through employment or self-employment. If you are a person with a disability and you are working, you can still qualify for the EITC just like any other worker, as long as you meet the income requirements. The maximum amount of the EITC changes annually and is determined by your filing status and number of qualifying children. Some individuals with disabilities may not have children or qualifying dependents but could still qualify for a smaller EITC based on their income.

Partially Refundable

The Child Tax Credit[4] is refundable or partially refundable. You are eligible to receive the full 2024 Child Tax Credit ($2000 per child) for each qualifying child if you meet all the necessary requirements and your annual income does not exceed $200,000 ($400,000 for joint filers). If your tax liability is less than the value of your child tax credit, you may be eligible for a partially refundable credit calculated using the earned income formula, and up to $1,700 per child.

Nonrefundable

For nonrefundable tax credits, once your tax liability is zero, you will not get any leftover amount back as a refund.

Other Dependent Credit[5] is a nonrefundable credit of $500 for a qualifying dependent, such as a child over 17 years old or a parent.

The Child and Dependent Care Credit[6] is another nonrefundable credit designed to relieve the burden of two-earner families who incur dependent care expenses. A qualifying dependent is either under age 13, any age if the person is physically or mentally incapable of self-care and qualifies as a dependent, or a spouse who is physically or mentally incapable of caring for themselves. For the 2024 tax year, you can claim from 20% to 35% of your care expenses up to a maximum of $3,000 for one person, or $6,000 for two or more people.

The nonrefundable Adoption Expense Credit[7] may be claimed per child. For a qualified adoption of a child under age 18,expenses related to legal fees, court costs, and other related costs may be eligible for the credit. Note: for an adoption of a child with special needs, you may receive the full credit regardless of expenses.

Other Considerations

There are a few other items that are important to remember when reviewing your tax strategy. If you are elderly or blind, you may claim an additional amount for your standard deduction. If you have high investment income, such as a substantial realized capital gain, you may be subject to the Medicare Surtax. Though the threshold has increased, you may also be subject to Alternative Minimum Tax (AMT) after certain deductions are added back to your income.

Working closely with your tax adviser, Chartered Special Needs Consultant (ChSNC^®) and CERTIFIED FINANCIAL PLANNER^TM professional can help you prepare in advance to create a tax strategy that accounts for all these factors and which may ultimately help to alleviate some of the high costs you may be incurring throughout the year.

If you need help with financial or tax planning for special needs, Modera has advisors who specialize in this area and are available to help you. Please reach out to learn more.