If you have a special need child, maximizing tax benefits is essential. This guide provides a quick summary of some of the available tax benefits. A good tax advisor can help you maximize the benefits available to you.
Medical Expense Deductions
Medical expenses are generally deductible to the extent they exceed 7.5% of Adjusted Gross Income (AGI). In addition to the expenses that are normally deducted for medical purposes (doctors, dentists, hospitals, etc.), following are some additional items that may apply to a special need child:
- Special schooling including tuition or tutoring by someone especially trained to meet the child’s needs. The purpose and primary reason for the choice of school must be to alleviate or remediate the disability.
- Aides required for a child to benefit from regular or special education
- Special instruction, training or therapy such as Occupational Therapy (OT), speech, remedial reading, etc.
- Diagnostic evaluations by qualified personnel.
- Exercise program, if recommended by qualified medical personnel to treat a specific condition, including yoga, dance, horseback riding, etc.
- Transportation:
- Mileage to and from special schools or therapy sessions. 23.5¢ per mile for 2012.
- 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 include a specially designed bed, car seats, etc.
- Home Improvements – cost are deductible to the extent they exceed any increase in the home’s fair market value. Certain improvements (e.g., altering the location of or otherwise modifying electrical outlets and fixtures) are deemed to have no effect on the home’s fair market value and, thus, the full cost can be claimed as a medical deduction.
- Parents’ attendance at a disability related conference. Attendance is considered to be primarily for and essential to the care of the dependent 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 well-being AND
- The primary purpose of the visit is to attend the conference.
- But, costs of food and lodging generally are 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.
- Special diets such as gluten-free, casein-free diets. Only the excess cost of the gluten-free product over what you would pay for a similar item at a grocery store. You can also claim mileage expense for the trips to the health food store and postal costs on gluten-free products ordered by mail.
Additional Things to Consider
Subsequent Reimbursement – If you anticipate receiving reimbursement from a school district or insurance company for any of these costs, that reimbursement will be includable in income when received if deductions have been taken.
401K/IRA funds – If used for a medical expense, it can be used to justify a “hardship” withdrawal from a 401(k) retirement plan. 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. Also, beware that the inclusion in gross income will increase AGI and thus reduce the medical expense deduction.
Health savings accounts (HSA) or Flexible Savings Accounts (FSA) –
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.
Health Savings Accounts – For 2012, a family can contribute $6,250 to an HSA on a pre-tax basis and use if for medical expenses. An HSA may only be opened when the employee has a “high deductible” health insurance plan. If you do not maintain an HSA compatible plan through December 31st of the following year, your maximum contribution will be prorated. Amounts placed in an HSA may be carried over to subsequent years if not used.
Flexible Savings Account – FSAs can be part of an employer’s cafeteria plan. You can use these funds to pay for medical expenses not covered by insurance, such as co-pays and deductibles. Currently, for 2012, there is no cap on the maximum annual contribution to FSAs. However, many employers will limit their employees to a maximum amount annually which will be disclosed in the plan document.
The Health Care Bill enacted in 2010 brings with it some changes to flexible spending accounts. The biggest change is that over-the-counter medications will no longer be covered without a doctor’s prescription. Diabetic supplies will continue to be covered. Also, beginning January 13, 2012, health care reform will cap an individual’s maximum contribution amount to $2,500 per year for medical expenses. This amount will be annually adjusted for inflation beginning in 2014.
Two things to remember – 1) the amount placed into the account must be determined by the employee at the beginning of the year and 2) funds in the FSA not used by the end of the year are forfeited.
Child & Dependent Care Credit
Child & Dependent Care credit is available for work related expenses for dependents of the taxpayer. Dependent must be under the age of 13. BUT, if the child is disabled and requires supervision, the age limit no longer applies.
Covered expenses are allowed for up to $3,000 per year per dependent, maximum for all dependents of $6,000. Regular childcare, after-school programs and day camp qualify. Sleep-away camps do not qualify. Payments to a relative to care for a child also qualify, as long as the relative is not a dependent of the taxpayer. Credit is calculated at 20-35% of expenses, based on AGI. Maximum dependent credit for one qualifying dependent is $1,050. Minimum dependent credit for one qualifying dependent is $600.
Retroactive claims for refunds
You can file amended tax returns and collect refunds for unclaimed tax benefits retroactively for up to three years.
