Potential Income Tax Benefits For Special Needs Families – Part 3

iStock_School Bus Disabled SignXSmallLast part in a three part series – Part 1 July 9 and Part 2 July 10, 2013.

CRITERIA FOR A SPECIAL SCHOOL

A school is a special school if the ordinary education it provides is incidental to the special services  provided. Thus, the curriculum of a special school may include some ordinary education, but this must be incidental to the school’s primary purpose to enable the student to compensate for or overcome a handicap, to prepare him or her for future normal education and living. Examples of a special school are schools with programs to “mainstream” children with neurological disabilities (e.g., autism spectrum disorders) and schools that teach Braille, lip reading, or sign language. Deductible special school costs include: lodging and meals, transportation, incidental educational costs provided by the institution, and costs of supervision, care, treatment, and training. Regular schools be classified as a “special school” if it has a special curriculum for the disabled individual (Rev. Rul. 70-285). The costs for private tutoring by a teacher who is specially trained and qualified to deal with severe learning disabilities are deductible, provided the child’s doctor recommended such tutoring (Rev. Rul. 78-340). Dyslexia is a medical condition that handicaps the child’s ability to learn. Therefore, if a child is diagnosed with dyslexia, the costs of special education to overcome dyslexia are deductible medical care expenses (Letter Ruling 200521003).

Credit For Special Needs Adoption Expenses

•  $12,970 for a special needs child ($12,650 in 2012), regardless of adoption expenses.
•  Must be a U.S. citizen or resident who requires adoption assistance. •  Qualifying expenses include legal fees, court costs, and other adoption-related costs.
•  The limit is per child, not per year (the credit was refundable for 2010 and 2011 only; for pre-2010 credits and post-2011 credits, the credit is nonrefundable with a carryover of five years). The credit phases out for taxpayers with AGI exceeding $194,850 ($189,710 in 2012); the credit is phased out completely at $40,000 above the threshold.

Conclusion

The number of individuals with special needs is escalating at unprecedented rates. Some experts argue that this may simply be a matter of better recognition of special needs, as changes in autism diagnostic criteria have evolved over the years. Now, autism is the sixth most commonly classified disability in the United States. Whether due to diagnostic changes or not, these increased numbers are affecting state and local government programs as they face shortfalls because of increasing demand for services, forcing parents to absorb more of their children’s medical care and other related expenses.

This article provided a brief overview of some of the more common deductions and credits that may be available under current tax law. However, practitioners with clients who are parents of special needs children should be aware that specific rules apply to each benefit and the determination of whether a benefit applies is often fact-specific. For example, to claim a child’s educational expenses as medical expense deductions when the child attends facilities that are primarily educational and not special schools, the particular services provided to the child must be considered. Similarly, deductions for medical conference expenses are case-specific. Even the generally available EITC has multiple requirements and limitations. In the end, it is important for practitioners to understand that substantial tax benefits are available to those caring for children with special needs and to make clients who have special needs children aware of them.

Helpful IRS Publications:  Tax Benefit Checklist for Families Caring for Special Needs Children and   Deducting the cost of a special school or institution

By Thomas M. Brinker Jr. and W. Richard Sherman

Edited and posted by Harold Goedde CPA, CMA, Ph.D. (taxation and accounting)

Dr. Goedde is a former college professor who taught income tax, auditing, personal finance, and financial accounting and has 25 years of experience preparing income tax returns and consulting. He published many accounting and tax articles in professional journals. He is presently retired and does tax return preparation and consulting. He also writes articles on various aspects of taxation. During tax season he works as a volunteer income tax return preparer for seniors and low income persons in the IRS’s VITA program.

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