Caring for a loved one with special needs can run into millions of dollars over the course of their lifetime, so the last thing families need is to pay unnecessary taxes. I’d estimate that before beginning to work with a special needs attorney, 30 percent of my clients had overlooked important savings. Here are general guidelines to keep in mind as you prepare your 2013 taxes. Be sure to consult your tax advisor on your specific situation.
Who’s a dependent?
First of all, remember that an adult child or frail parent can be claimed as a dependent if you’ve covered over 50 percent their expenses and their yearly income is lower than their personal income tax exemption.
Secondly, calculate the unreimbursed health-related expenses you’ve incurred throughout the year. For most families with special needs, this will easily surpass the required threshold of 10 percent of adjusted gross income (7.5 percent if you or your spouse are 65 years or older). If you get your insurance through an employer, check to see if you’re paying your portion of the premiums on a pre- or post-tax basis. Only the latter can be deducted.
If you can’t claim a parent as your dependent but are helping out by paying directly for their medical expenses, they may still be able to claim a deduction for those expenses on their income tax filing.
Families sometimes fail to deduct the cost of evaluations, therapies and assistive devices such as hearing aids and prostheses. And don’t forget the expense of traveling to and from health care providers.
Registration fees for conferences focused on a specific disability can also be claimed, along with transportation. It helps to have a doctor’s written recommendation that you attend.
If you’re paying a home care aide to help someone with two or more “activities of daily living”—such as bathing, eating or toileting—the expense is deductible, but the service must be performed by a licensed health care practitioner. Home modifications such as ramps, railings and widened doorways count, too. Elevators are an exception, since they contribute to a home’s market value.
You may also be entitled to deductions for purchase and care of a service dog. Again, it’s best to be prepared with a letter from a physician or psychologist indicating that the dog provides medically necessary support.
If your child attends a school that prepares students for mainstream education or independent, community-based living, you can claim tuition and school supplies.
Premiums for “qualified” long-term care insurance are deductible –in accordance with age limits—on federal returns, and many states allow you to claim a percentage of the cost. Since details differ, read the fine print.
Does your loved one have unreimbursed employee expenses, including costs related to sheltered workshops? Adaptive equipment, specialized transportation or a workplace aide are deductible and not subject to a threshold.
Also be sure to investigate your eligibility for tax credits for dependent care and the “elderly disabled.”
Special Needs Trusts
Longer term tax planning should involve the creation of special needs trusts (SNTs), which protect funds intended to enhance quality of life for an individual with disabilities without rendering them ineligible for means-tested government benefits.
Third party SNTs, created by family members or friends on behalf of a person with special needs, are often revocable initially, meaning that the creator can withdraw funds for any reason at any time. As such, they’re automatically considered grantor trusts, meaning that deductions (such as the cost of implementing the trust) and tax liability for investment income, flow to the establishing parties.
Once the SNT becomes irrevocable, though, taxes on investment income must be paid by the trust, at a significantly higher rate. Any distributions made to the beneficiary during the same tax year, will offset dollar-for-dollar, the investment income. Distributions then become taxable to the beneficiary.
While first party SNTs, established with assets belonging to the beneficiary, are automatically created as grantor trusts in most states, in some instances, an attorney will need to add provisions for tax-advantaged treatment. With grantor trust status, the beneficiary becomes responsible for investment income generated by the trust, even if no distribution takes place.
For more information on the taxation of SNTs, click here.
Preparing for 2014
In the meantime, be alert to changes that could significantly affect your 2014 taxes. Under the language of the Affordable Care Act (Obamacare), many families with special needs are, for the first time, eligible for private insurance without a pre-existing condition exclusion.
However, the implementation of Obamacare is rapidly changing, and several health organizations, such as the Autism Health Insurance Project, recommend that if you receive affordable health insurance from your employer and it meets most of your needs and those of your child , your best option is to stay put. http://www.autismhealthinsurance.org/aca
Families and individuals earning less than 400% of the federal poverty level (FPL) are eligible for assistance in the form of a premium tax credit. In 2013, for a family of four persons living in the 48 contiguous states and Washington, D.C., the annualized FPL was $94,500. Families with income less than 133% of FPL ($31,322 for a family of four) are eligible for Medicaid in participating states. Subsidies available from the federal government and these public programs can be tricky. What if you lose your job during the year and suddenly qualify for additional assistance? What if you’re self-employed with a hard-to-predict cash flow? You should notify the Health Insurance Marketplace of such changes to financial status throughout the year. Otherwise, you’ll need to work out the difference—a deduction or penalty – on your April 2015 filing. Current information is available from the IRS here: https://www.irs.gov/affordable-care-act/individuals-and-families/questions-and-answers-on-the-premium-tax-credit
Before relying on Medicaid, you should be certain that your state’s Medicaid program covers the services you need. For example, only a few states’ Medicaid programs offer certain therapies important for children with autism. In states that have insurance exchanges, coverage under policies offered through exchanges may be different that coverage offered through private companies. For example, not all states that require private insurance companies to cover autism treatments require the insurers participating in the exchange program to include these provisions in their policies.
Meanwhile, federal agencies and state governments are struggling to respond to the Supreme Court’s decision on DOMA (Defense of Marriage Act), which requires the federal government to provide the same benefits to same-sex spouses as have long been available to heterosexual marriage partners. Questions abound concerning the rights of couples living in states that do not recognize same-sex marriage. And what if they move between states with incompatible laws? At this writing, Social Security has advised SSI (Supplemental Security Income) administrators to accept applications without making eligibility decisions. To determine the effects on your family finances, pay close attention to the following websites: https://www.ssa.gov/news/press/index.html (Social Security Administration); https://www.hrc.org/resources/spousal-benefits-recognizing-same-sex-spouses-for-benefits-programs (The Human Rights Campaign); https://www.marriageequality.org/resources (Marriage Equality USA)
In addition, same-sex couples in which the parties earn roughly equal incomes will be hit with a “marriage penalty” that’s likely to push them into a higher tax bracket. I currently have several clients facing this unforeseen financial dilemma.
Don’t wait till the last minute. Careful tax planning has the potential to save you a bundle, and it’s worth the time invested.