Tax Planning for Parents of Children with Special Needs

By Karen F. Greenberg, MBA, CFP®

Parents or other caregivers of loved ones with special needs may qualify for valuable tax benefits, which may be overlooked by tax preparers who are unfamiliar with the autism and other spectrum disorders. These unique tax benefits may entitle parents to additional refunds of thousands of dollars.

Families often incur a myriad of expenses because of their child’s treatment and life style expenses, many of which are deductible as medical expenses.

Taxpayers who itemize deductions can claim medical expenses to the extent that they exceed 7.5 percent of adjusted gross income . The challenge is to be aware of which expenses may be allowable and to keep track of them.

Aside from the traditionally well-known medical expenses such as prescriptions, doctors and dental treatments, eyeglasses, lab and hospital tests, therapies and health insurance premiums, there are many other deductible expenses you may not readily think of.

Your physical or speech therapist may recommend certain activities, such as music lessons, gymnastics, horseback riding, swimming, or other sports activities as an adjunct to the therapy. These expenses, as well as travel to and from these activities are also deductible. Be sure to ask your therapist or doctor to write an updated note recommending the suggested activity for your tax files.

In addition, you may choose to attend workshops or informative seminars or conferences about your child’s disability and treatment. The cost of these conferences as well as travel and lodging costs ($50 per night per person) may be deductible.

If your child attends a special school, tuition costs, tutoring and educational supplies (such as software, books and videos as learning tools), which are designed to educate special needs children, may be deductible. Sign language instruction, speech therapy, remedial reading instruction and related books and materials, in addition to transportation including parking and tolls, are deductible.

The cost of diagnostic evaluations including testing by a speech-language pathologist, psychologist, neurologist, or other person with professional qualifications, may be deductible.

The cost of a patient care attendant (such as a babysitter or care giver) may also be deductible, so if you must hire someone to stay with your older child or adult child while you are out, keep the receipts for these expenses.

A capital expenditure, such as a home improvement or upgrade to make a home or auto handicap-accessible, qualifies as a medical expense if it has as its primary purpose the medical care of the disabled child, but only to the extent that it exceeds any increase in property value. Therefore, as an example, the partial cost of a home generator, if your child has an underlying health condition, (such as asthma) may be considered a qualified medical expense.

Over-the-counter medications that can be purchased without a doctor's prescription, such as aspirin, are not deductible. Nor is the cost of nutritional or herbal supplements, vitamins, and natural medicines are not deductible as medical expenses, unless they can be obtained legally only with a doctor's prescription. However, the cost of special foods, such as gluten-free products, may be deductible to the extent the cost exceeds regular food.

You should also be aware that a special needs trust may afford your family some tax benefits. An irrevocable special needs trust may be drafted by an attorney, as an estate planning tool. These trusts can also be a great way of saving for your child’s future care costs, and a supplement to governmental benefits your child may be entitled to.

Funds placed in a special needs trust are not counted as your child’s assets, and will not jeopardize needs based entitlements. If the special needs trust is properly drafted, it will be considered a “qualified disability trust,” which has a very generous standard deduction (equivalent to a personal exemption) currently $3500 under current 2009 treasury regulations. This means that the first $3500 of investment income generated by a special needs trust will be offset and therefore not taxable. The same investment income on your tax return may be taxed at your tax rate (currently 25-28% for most tax payers).

The special needs trust may be used to accumulate funds for the future, but may also be used for any currently-qualified special needs expense. Special needs trusts may be funded with any investments an individual can own, and can be a great way for grandparents or other family members to help provide for any current or future lifestyle expenses.

Remember to keep receipts, cancelled checks or credit card documentation along with your doctor or therapist written recommendation to secure these valuable deductions.

Karen F. Greenberg. MBA, CFP ® is the mother of an adult child with autism, a tax preparer and Certified Financial Planner™ practitioner. Her home office is located at 4673 Brady Blvd. in Delray Beach, FL 33445. (561) 638-6945. Email to KFGreenberg @ cs.com.