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Taxes Can Get Complicated for Families with Special Needs

This post was authored by Robert F. Brogan, CELA [1], president of the Brogan Law Group [2], with offices in Brick and Manchester, New Jersey. He focuses on special needs planning, elder law and asset protection. He is a member of the SNA Board of Directors.

It’s time to think about taxes, which can be complicated for families with special needs. Even professional tax preparers are often unfamiliar with some of the intricacies.

Disability Payments

Certain disability payments are taxable, while others are not. The following benefits may involve tax liability:

These disability benefits are exempt from taxes:

Child’s Net Unearned Income

There’s been a lot of back and forth on this issue, but the latest news is good.  The 2017 tax overhaul stipulated that a minor’s unearned income exceeding a modest threshold ($2100 in 2018) would be taxed at the same high rate as estates (up to 37 percent). But that changed under legislation passed late last year. A child’s unearned income now gets taxed at the parents’ personal rate, and families have an option to amend their 2018 filings to reflect this.

Deductions

The standard deduction is currently $12,000 for singles and $24,000 for married couples filing jointly, so itemizing isn’t always practical. A higher standard deduction is available for individuals who are blind or over 65. On the other hand, be sure that you’re considering all the deductions to which you’re entitled. Here are some of the more notable ones:

Note that alimony payments are no longer deductible.

Credits

There are also various credits, to which you may be eligible regardless of whether or not you take a standard deduction.

Special Needs Trusts

You may be surprised to learn that while investment income realized by a special needs trust (SNT) [5] doesn’t affect eligibility for means-tested benefits, it’s still taxable, depending upon the type you have. In some cases, the trust must file a separate income tax return [6], while in others, trust income must be reported on the beneficiary’s personal tax return—even though they never directly received the funds.

ABLE Accounts

ABLE accounts [7] are savings accounts for individuals with disabilities whose disability occurred prior to age 26. Beneficiaries can have direct control of funds without affecting eligibility for means-tested government programs, so long as distributions are used for broadly defined “qualified disability expenses.” Earnings are tax-free, as are qualified distributions.

Contributions to the accounts are not deductible, although lower-income beneficiaries may be eligible for a “saver’s credit.”

These are complex issues, and it’s important to consult with a tax professional who is versed in special needs. In addition, the IRS provides assistance [8] to individuals who are unable to complete a tax return due to a disability.

About this Article: We hope you find this article useful and informative, but it is not the same as legal counsel. A free article is ultimately worth everything it costs you; you rely on it at your own risk. Good legal advice includes a review of all the facts of your situation, including many that may at first blush seem to you not to matter. The plan it generates is sensitive to your goals and wishes while taking into account a whole panoply of laws, rules and practices, many not published. That is what SNA is all about. Contact information for a member in your state may be obtained by visiting Find an Attorney [9].

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