6 Tax Tips for Parents of Children with Special Needs

Third article of a four part series

Family and Special Needs Child

The diagnoses of autism, Asperger’s syndrome, and other disorders are skyrocketing. The cost of raising and educating a child with special needs can put a severe financial strain on parents. The tax code provides some relief for these parents.

When counseling clients with special needs children, not only must we plan ahead for the child’s future after mom and dad are gone, but it is also essential to help the parents navigate the financial challenges of the present.

1. Specialized Education & Medical Expenses
The cost of a “specialized” school for a child with special needs is deductible as a medical expense. Like all medical expenses, they are only deductible to the extent they exceed the 10% of adjusted gross income floor for medical expenses. Through the end of 2016 the floor is 7.5%, if you or your spouse are age 65 or older. In order for school costs to be deductible, managing or correcting the disability must be the principal reason for attending the school, and any ordinary education received must be incidental to the special education provided.

A regular school can still be considered a "special" school. The deductibility of tuition depends on what the school provides to an individual student. A school can have a regular education program for most students, and a special education program for those who need it. A school can be "special" for one student, but not for another.

When an individual attends a "special" school for the physically or mentally disabled, the cost of deductible medical care includes the cost of meals and lodging, if supplied, and the cost of ordinary education furnished which is incidental to the special services furnished by the school.  All the costs of transportation, supervision, care, treatment, and training are also deductible as medical expenses.

If the school is a regular school but the child receives special services from the school related to a physical or mental disability, the extra cost for the special services may be claimed as a medical expense. Another possible medical expense deduction is private tutoring by a specially trained teacher to provide therapeutic and behavioral support services. The IRS has identified several types of schools that qualify. Rev-Rul. 1970-285 and Treasury Regs. Sec.1.213-1(e)(1)(v)(a) provide detailed guidance.

2. Parent Education
If the parents travel to and attend a medical conference in order to make informed decisions about their child’s treatment, the costs of the conference and transportation costs are deductible as medical expenses. However, you cannot deduct lodging expenses.

3. Home Improvements
If parents have to make modifications or improvements to their home to accommodate a child with special needs, part of these costs may be deductible. The modifications may be deducted to the extent that the improvement costs exceed any increase in the home's fair market value.

4. Flexible Spending Account
Since medical expenses are deductible only to the extent that they exceed 10% of adjusted gross income (and 7.5% for over 65 through 2016), a better result can be obtained if the parents’ employer provides a medical flexible spending account (FSA).

Contribution that the parents make to the FSA are completed pre-tax and are excluded from their gross income.  Using funds from the FSA will make the expenses, in effect, 100% deductible without reference to the 10% limitation on deductibility of medial expenses.

If special education qualifies as a medical expense, it can also be used to justify a "hardship" withdrawal from a 401(k) retirement plan.

5. Dependent Care Credit
Parents can generally claim a dependent care credit for the costs incurred caring for dependents under the age of 13, so that parents can be gainfully employed. If a child is physically or mentally incapable of caring for himself or herself, these medical costs are also eligible for the dependent care credit regardless of the child’s age.

A child is no longer a "qualifying child" for the dependency exemption when he or she reaches age 19, or age 24 if a student.  If a child is over 24 and his or her gross income does not exceed the amount of the exemption, the child can still be claimed as a dependent. Gross income for this purpose does not include income earned by a "permanently and totally disabled" dependent in a sheltered workshop as long as the availability of medical care is the principal reason for the dependent being there. 

6. Adoption
If you adopt a child with special needs, there is a $13,400 per child tax credit available. An eligible child is a child with special needs, a United States citizen/resident, and the state has already determined that the child cannot, or should not, be returned to his or her parents’ home and probably will not be adopted unless assistance is provided. If the child has special needs, the full amount of the credit can be taken regardless of the actual expenses.