Tax Strategies for Special Needs Families

By Mindy Neira, , CFP®, ChSNC®

Wealth Manager, Principal

August 30, 2019

If you or a loved one has disabilities or special needs, you know that the costs related to care can be substantial. The good news is, you may be able to reduce these costs by maximizing the tax strategies available to you.

Below I’ve outlined four main areas to focus on when assessing your tax situation. A Certified Public Accountant (CPA) or a tax advisor 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 tax deductions that you are eligible for and that you maintain them in the future.

Medical Expenses

As of 2019, an itemized deduction is available for medical expenses greater than 10% of Adjusted Gross Income (AGI). For many this is a large hurdle to overcome, but for someone with costs related to a disability or special need, you may be spending double the amount of a typical taxpayer. The key is to be diligent in tracking your medical expenses, obtaining documentation of physician recommended expenses, and planning ahead with your CPA.

Examples of deductible medical expenses are: 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 cannot deduct expenses for nonprescribed medicines, drugs, vitamins, or health foods.

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

Special schools and institutions: If your child 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 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 dependent’s medical condition in order to assist them, the cost of attending these conferences and seminars, including transportation, is deductible. Lodging and meal costs are not.

Nursing home and long-term care: Expenses incurred in a nursing home or long-term care (LTC) facility are deductible if you 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.

Medical travel and transportation: The cost of travel to 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. Unlike for medical conferences and seminars, a portion of lodging costs for you and one other person may be deductible, if an overnight stay is required. The meals during your stay, though, are not.

In addition to tracking expenses for a deduction, you should consider a Flexible Saving Account (FSA) to set aside pre-tax money to directly lower your taxable income. This account is used to cover medical expenses throughout the year. Keep in mind that the full account balance must be used by year end.

Impairment Related Work Expenses (IRWEs)

You may also deduct 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 required while you work, a reader if you are blind, transportation costs, service animals, medical devices, medication, or other expenses that are necessary in order to do your work satisfactorily. This deduction is considered a business deduction and is not subject to the 10% of AGI limitation.

Retirement Plan and IRA Distributions

If you withdraw from a qualified retirement plan or Individual Retirement Account (IRA) before age 59 1/2, your distributions are subject to a 10% penalty. A penalty waiver may apply, if you meet the definition of disability from the Social Security Administration and are receiving Social Security Disability (SSDI).

A penalty waiver may also apply if you have substantial medical expenses. If distributions are used for medical care, the penalty is waived on amounts less than or equal to your allowable medical expense deduction (excess of 10% 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 CPA and financial planner to determine the best strategy.

Refundable and Non-refundable Credits

There are two refundable credits you may be able to take advantage of in 2019: The Earned Income Tax Credit (EITC) and the Child Tax Credit. Both are subject to income phaseouts.

The EITC amount depends on your earned income and the number of qualifying children you have.

The Child Tax Credit applies to each qualifying child, under age 17. There is also a nonrefundable credit for a qualifying dependent, such as a child over 17 years old or a parent.

There are two non-refundable credits that may also benefit you in 2019: The Child and Dependent Care Credit and the Adoption Expense Credit. Again, both are subject to income phaseout.

The Child and Dependent Care Credit is 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.

The Adoption Expense Credit 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. For an adoption of a child with special needs, you may receive the full credit regardless of expenses.

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 was increased, you may also be subject to Alternative Minimum Tax (AMT) after certain deductions are added back to your income.

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

If you need help with tax planning for special needs, a special needs trust, or anything other financial planning need Modera advisors who specialize in this area are available to help you. To learn more, please contact Mindy Neira.

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