Families of children with disabilities face a host of added expenses so it’s only fair that there are special tax breaks that are available to help lighten the load as well. We’ll help you navigate the paperwork and make sure that you’re applying for every exemption, deduction and credit that your family deserves.
Tax Benefits and Credits for Parents of Children with Disabilities
Provided by: The Life Cycle Series www.irs.gov
As a parent of a child with a disability, you may qualify for some of the following tax exemptions, deductions and credits. More detailed information may be found in the IRS publications explained below. Links are provided for each publication.
You may be able to claim your child as a dependent regardless of age if they are permanently and totally disabled:
Types of Credits
Dependent with a disability working at a Sheltered Workshop: You may be able to claim a dependency exemption for a qualifying child or qualifying relative. Gross income does not include income from services the individual performs at a sheltered workshop however they must still meet the other dependency tests. See IRS Publication 501 for more information.
Adoption Credit: You may be able to claim an adoption credit and exclude employer-provided adoption benefits from your income if you adopt a child with special needs. See IRS Publication 907 for more information.
Earned Income Tax Credit (EITC) for parents of children with disabilities: You may qualify for this credit if your qualifying child is permanently and totally disabled regardless of age, as long as you meet the other requirements. See IRS Publication 596 for more information.
Child or Dependent Care Credit: You may be entitled to this credit if you pay someone to come to your home and care for your dependent or spouse regardless of their age if they are unable to care for themselves. Persons who cannot dress, clean, or feed themselves because of a physical or mental problems are considered not able to car for themselves. Also, person who must have constant attention to prevent them from injuring themselves or others are considered not able to care for themselves. See IRS Publication 503 for more information.
Medical Conferences: You can include in medical expenses amounts paid for admission and transportation to a medical conference if the medical conference concerns the chronic illness of yourself, your spouse, or your dependent. See IRS Publication 502 for more information.
Income Tax Tips for Caregivers
Written by: Darryl Lee Brown, Ph.D, MST, MSA, CPA*
Every year at this time millions of Americans scramble to file or extend their income tax returns. This article explores some of the Internal Revenue Code (IRC) sections that might affect (or relate to) the taxation of parents of disabled or special healthcare needs children. Many of these tax provisions also apply to parents with adult children who are disabled or have special healthcare needs. I specifically focus on federal income taxes and do not discuss state income taxes, which vary a great deal from state to state. This material should not be regarded as advice and, in all cases, a tax advisor or the IRS should be consulted.
Tax credits reduce your tax liability and in some cases they can result in a refund. The IRC offers several tax credits for which parents with disabled or special needs children might be eligible, including but not limited to the following:
Each credit has its own specific set of operative rules and a tax advisor (or the IRS at www.irs.gov) should be consulted to determine eligibility.
Income Subject to Taxation
Supplemental security income benefits are not included in gross income. However, certain settlements (lump-sum and otherwise) can be included in gross income if they are for punitive damages. Settlements that relate to personal injury or sickness are not included in gross income. If the settlement proceeds are taxable they could cause all or a portion of a dependent’s social security income to be taxable. Any uncertainties as to the taxability of settlement proceeds should be resolved by your tax advisor or the IRS.
You may exclude from income employer provided qualified dependent care assistance. The exclusion is limited to $5,000. In general, to be eligible for the exclusion, your dependent must be under the age of 13 or the dependent must be unable to care for herself and must live with you for more than one-half of the tax year.
The IRC provides a deduction for expenses paid during the taxable year (except where such expenses are compensated by insurance or otherwise) for medical care of the taxpayer, his dependent or both. The deduction is limited to the amount that exceeds 7.5 percent of taxpayer’s adjusted gross income. Additionally, the taxpayer must itemize her deductions in order to take advantage of this provision and the deduction is also limited to “qualified medical expenses.”
In general, qualified medical expenses are amounts paid during the taxable year for the “diagnosis, cure, mitigation, treatment, or prevention of disease or for the purpose of affecting surgery or function of the body.” Amounts paid for unnecessary cosmetic surgery are not qualified medical expenses and are not deductible. As a general rule, expenses must be “essentially medical in nature” to be deductible.
The IRC also allows a deduction for medical costs associated with travel (to and from doctor’s office), lead paint removal as well as capital improvements to your personal residence, if such improvements are medical related. Transportation expenses including out-of-pocket expenses such as gas and oil, parking, and other transportation costs are deductible. Taxpayers may use a standard mileage rate to calculate the deduction or they may use the actual amount of expenses incurred. Should your child or dependent’s medical care require travel away from home, certain lodging expenses might be deductible. The cost of related meals, however, is not deductible. Expenses related to the cost of removing lead-based paints from your home to prevent a child who has had or has lead-paint poisoning from consuming the paint may be deducted as qualified medical expenses.
Qualified medical expenses include expenses incurred for the installation of special equipment installed in your home, if the main purpose for the installation is to provide or maintain medical care for you, or your dependent child. For example, expenses incurred to maintain or construct wheelchair entrance or exit ramps for your home and expenses that modify your home if the expenses are necessary to accommodate a home to a disabled condition are deductible. These expenses include the cost of improvements related to medical care as discussed and described above.
Special Tax Rules for Adopting a Child With Special Needs
The IRC provides a tax credit, subject to certain income and tax liability limitations, for certain qualified adoption expenses incurred during the year. In addition to the credit, some or all employer provided monetary assistance may be excluded from gross income. Both the credit and the exclusion may be taken. For example, a credit of $10,630 and an exclusion of $10,630 may be taken for 2005. For 2005, $10,630 is the maximum credit and exclusion allowed. Qualified adoption expenses include all adoption fees, court costs, attorney fees and other expenses directly related to the adoption of a qualified child. A qualified child is a child under the age of 18 or physically or mentally incapable of self-care. A special rule exists for the adoption of a child with special needs. The maximum credit will be allowed for the adoption of a child with special needs even if you do not have any qualifying expenses. An eligible child is a child with special needs if he or she is a citizen or resident of the United States (including U.S. possessions) and a state (including the District of Columbia) determines that the child cannot or should not be returned to his or her parents’ home and might not be adopted unless adoption assistance is provided. States use factors such as the child’s ethnic background, the child’s age, whether the child is a member of a minority or sibling group, or whether the child has a medical condition or physical, mental, or emotional handicap. If your state has determined that the child you are adopting is a child with special needs, you should keep evidence of that fact for your records.
To safeguard tax deductions and credits, taxpayers should keep accurate records to substantiate all deductions and income exclusions discussed above including cancelled checks, receipts, insurance reimbursement receipts, et cetera. Records should be kept (in a safe place) for as long as they are needed to substantiate the deductions included in the income tax return. In general, a period of six years is recommended.
Dr. Brown’s tax consulting firm is ADMO & Associates, CPAs, serving clients in AZ, MA and IL; he is also an assistant professor of accounting and taxation at Illinois State University and can be reached at http://www.ilstu.edu or (520) 401-5802. This material and information contained herein is not to be regarded as advice for any individual case. Applicability to specific situations should be determined through consultation with your tax advisor.