If you have a dependent with a severe disability such as a learning disability (SLD), autism spectrum disorder (ASD), ADHD, or other physical, mental or emotional impairment, you may qualify for special tax benefits. Here is a brief summary of the most significant federal income tax benefits.
Medical expense deductions
The IRS has ruled that the costs for school programs designed to educate children with disabilities by a teacher trained and qualified to deal with severe disabilities is deductible (Revenue Ruling 78-340, 1978-2 C.B. 124.). Generally, to qualify for the deduction, the child’s doctor must recommend the special school, therapy, or tutoring, and there must be a medical diagnosis of a neurological disorder, such as a severe learning disability, autism spectrum disorder, or ADHD made by a medical professional.
Some of the expenses that qualify include:
- Tuition to a private school
- Tutoring by specially trained individuals
- Diagnostic evaluations (by a private practitioner)
- Specialized materials (e.g., books, software, and instructional materials)
- Therapy (physical, speech, remedial reading)
- Transportation expenses to the private school or tutor (16.5 cents/mile in 2010)
Other medical expenses that may qualify:
- Exercise program if recommended by qualified medical personnel to treat a specific condition (i.e. yoga, dance, horseback riding)
- Diapers – if related to a medical condition, such as autism
- Specially designed beds, car seats, or other equipment or devices needed to accommodate the child’s medical condition
- Home improvements to the extent they exceed the increase in the home’s fair market value (Reg. 1.213-1(e) (1) (iii)
- Modifying or altering the location of electrical or plumbing fixtures for the safety of the child (Rev. Rul. 87-106, 1987-2 CB 67)
- Parent’s attendance at a disability related conference (Revenue Ruling 2000-24) including admission, transportation, and related books and materials. Attendance must be primarily for and essential to the care of the dependent child. Food and lodging are generally not deductible
The additional costs of following a medical diet such as a gluten-free or casein-free diet can also be considered medical expenses (Revenue Ruling 55-261, Revenue Ruling 76-80, 67 TC 481).
You are limited to the extra cost of the gluten-free product over what you would pay for the similar item at a grocery store. You can claim mileage expenses for trips to the health food store and postal costs on gluten-free products ordered by mail.
We recommend you obtain a letter from your doctor stating that your child suffers from a medical condition and must follow the prescribed special diet.
Legal expenses incident to medical care have been allowed as a medical expense deduction only when the legal expenses are “necessary to legitimate a method of medical treatment” Levine v. Commissioner (83-1 USTC ¶9101)
Child and Dependent Care Credit
The Child and Dependent Care Credit is allowed for work-related expenses incurred for dependents of the taxpayer. Generally the dependent must be under the age of 13. But, if the child requires supervision due to a disability, the age limit no longer applies. A dependent is considered to require supervision if the dependent is incapable of caring for his or her hygienic or nutritional needs, or requires full-time attention of another person for his or her own safety or the safety of others (Reg 1.44A-1(b)(4).
Expenses up to $3,000 per year for one qualifying dependent and up to $6,000 for two or more qualifying dependents are allowed. Expenses for regular childcare services, after-school programs, and summer camp qualify although overnight summer camp expenses do not. Payments to a relative to care for a child also qualify, as long as the relative is not a dependent of the taxpayer. The credit is calculated at 20-35 percent of allowable expenses, based on the family’s adjusted gross income.
Exemption for Dependents
A taxpayer is entitled to claim an exemption for each qualified dependent. This may appear relatively straightforward, but caretakers, such as grandparents, aunts, or even foster parents, may overlook this exemption. Also, in some cases following a divorce, a non-custodial parent who provides the majority of support for a child with a disability, and also pays for medical/educational expenses related to the child’s disability, may likewise qualify for both the exemption and medical expense deductions.
A new definition of “qualifying child” took effect in the 2005 tax year; the most significant change is that the taxpayer need not show support for a “qualifying child” but the child must have lived with the taxpayer for more than six months during the tax year. For each dependent, there is an exemption from taxable income, worth $3,650 for the 2010 tax year. Equally important, the dependency status is required for some tax benefits such as the child and dependent care credit listed above. Also, dependents under age 17 qualify for the Child Tax Credit, worth up to $1,000 per child.
Earned Income Credit
Low income families may qualify for Earned Income Credit (EIC) depending on the number of qualifying children and filing status. EIC is normally limited to children under age 19. If the child is 19-23 and a full-time student, then he or she also qualifies. As long as a severely disabled child lives with his or her parents, there is no age limit for EIC.
Retroactive claims for refunds
The IRS allows taxpayers to file amended returns, and collect refunds for unclaimed tax benefits retroactively, up to three years. This means a taxpayer can file an amended return and claim a refund for tax year 2007 if the return is filed not later than April 15, 2011.
Other things to consider
Related caretakers, such as grandparents or aunts, and non-relative caretakers, such as foster parents, also may qualify for some of these tax benefits.
Expenses claimed as a medical expense deduction and later reimbursed by an insurance company or school district must be reported as taxable income for the year in which the reimbursements are received.
Not everyone who has medical expenses can use them on their tax return. Medical expenses must be claimed on Schedule A, Itemized Deductions, and are subject to certain limitations. First, the family must have itemized deductions that exceed their standard deduction in order to use Schedule A (about 65 percent of taxpayers do not itemize for this reason). Second, medical expenses are allowed as a deduction only to the extent that they exceed 7.5 percent of adjusted gross income, a significant threshold for many families.
These materials are not intended to constitute tax or legal advice applicable to specific situations of the reader. Please consult your tax or legal advisor for specific laws and regulations regarding your specific situation.