By Richard L. Sayre, Esq., Spokane, WA
It’s time to begin organizing your tax documents, an exercise that can be particularly confusing when a family member has special needs. Here are some suggestions to bear in mind.
Exemptions and Deductions
When a loved one has special needs, the cost of health care is usually a major concern, so be sure that you claim all the deductions to which you’re entitled. Eligible outlays totaling over 7.5 percent of the taxpayer’s adjusted gross income can be subtracted. They include the unreimbursed cost of medical and dental care, related travel, insurance premiums, certain types of equipment and attendance at conferences on chronic illnesses. Expenses for medically required stays in a long-term care facility should also be included.
In some cases, it may be better to deduct disability-related job expenses ̶ such as special transportation or adaptive equipment—separately rather than as medical expenses. While these expenses may be subject to a two percent threshold, they won’t be held to the higher 7.5 percent threshold applicable to medical expenses.
Don’t forget that if you’re paying for over half the support of an adult child or frail parent, they can be claimed as dependents, as long as the exemption exceeds their personal income. A higher standard deduction is available for individuals with vision-related disabilities.
Families should also be aware of the following credits:
- Dependent Care – Up to 35 percent of day care expenses incurred while the taxpayer is working or seeking employment.
- Earned Income Tax Credit – For low- to moderate-income families with children under 19 (up to age 23, if children are full-time students). This also applies to adults with disabilities who work.
- Elderly Disabled – For individuals 65 or older who are filing income taxes.
- Disability income from a previous employer’s benefit plan – Eligibility is dependent upon income level.
Perhaps the most important tax decision occurs long before April 15, when a special needs trust (SNT) is first established for a child with disabilities. While the investment income generated by SNT-held funds doesn’t affect eligibility for means-tested government benefits, it is taxable. The applicable tax rate, though, depends on how the trust is structured and can vary greatly. It’s important to work with a knowledgeable special needs attorney in order to minimize that liability. Trusts are taxed at a much higher rate than personal incomes are ̶ up to 39.6 percent for income of $11,950 in 2013. In addition to the income tax, trust investment income, such as interest, dividends and capital gains, is subject to a 3.8% Medicare surtax. But if an SNT is structured as a “grantor trust,” the lower rate may apply. For a detailed discussion of trusts and taxation, see the January 2012 and February 2012 issues of The Voice.
Tax planning is clearly a complex matter for families with special needs and regulations may shift from year to year. Obtaining qualified advice can prevent costly mistakes.