Families caring for special needs children and all the requisite changes that come with them can expect to pay more than twice as much, up to $30,000 per year. It’s a sobering statistic, and while there’s no way to get around those additional expenses or the extra attention caregivers of a special needs child have to deal with and provide, one of the best ways a financial planner can help is to make sure that first and foremost, clients caring for special needs children or an adult with a disability have a life vest to keep them afloat. 

Studies done by The American College of Financial Services indicate 90% of special needs and disability caregivers and family members admit retirement planning isn’t their main priority: caring for their loved one through special needs financial planning is. Of caregivers and those with guardianship who are trying to save, 70% are concerned they’ll have to stop to provide their loved one proper support. This is a noble sacrifice to make, but the truth is clients can’t help their special needs children or loved ones in the long run by jeopardizing their own financial futures. They need to take care of themselves first, so they can then take care of others who need help. 

So what can financial advisors do with their expertise to help clients in these situations? Fortunately, there are some simple, common-sense goals for special needs planning any financial planner can start with. 

Any family, especially those who have guardianship of special needs children or other individuals, should have an emergency savings fund that can cover three to six months of their must-have expenses. Building up a cushion like this won’t happen overnight, especially if family members aren’t high-net-worth earners, so it’s important for the financial advisor to emphasize to them how critical it is to add a small amount of savings into their budget over time. They’ll be grateful for it if an unforeseen problem strikes, like a job layoff or needed household work. In addition, while it’s difficult to estimate future care costs of those with special needs, including Medicaid or eligibility for other government benefits, every little bit helps. Encourage caregiver clients to set aside a little every month into another savings account for retirement planning, or to start building assets their special needs loved ones can access once the caregivers are no longer around. 

In the spirit of planning for the future, those with guardianship of a special needs child or other individual should also look into leveraging any company 401(k) plans they might have to start stashing away money for their retirement and eventual estate planning, or use a traditional or Roth IRA. A solid goal is to set aside five percent of income to start and work up to 10 or even 15% over the next several years. When retirement age finally does come, caregiver clients will be under more financial stress than ever if they’re still caring for a special needs loved one or a person with a disability, and will need all the help they can get. Additionally, end-of-life preparations must be made, and ensuring a special needs child or adult is known legally as the beneficiary of any policies those with guardianship may have is a crucial step to take. 

Finally, a commonly-used saving method among financial advisors for special needs planning and disability-affected families is a 529 ABLE account: clients should consider opening one of these accounts, or perhaps a special needs trust, after they’ve maxed out retirement planning and other savings goals. A 529A can be used, much like a normal 529 college savings plan, to prepare financially for the education of any special needs child or individual with a disability. Since many special needs children or individuals with a disability will also need to attend special schools that cost more than the average education, it’s a valuable part of government benefits caregivers can’t afford to miss out on. 

According to the Center for Disease Control and Disease Prevention (CDC), the numbers have gone from one in 10,000 to one in 54. In addition to the psychological and financial implications of having a child diagnosed with an autism spectrum disorder or any disability, parents of children with special needs are often unaware of the substantial tax benefits available to them and frequently forego many potential tax deductions and credits in determining their tax liability. 

Medical care expenditures alone for a child with special needs can prove astronomical. As a result, parents and their financial services professionals need to become familiar with some unusual Internal Revenue Code provisions in assisting their clients in the planning process. There is a medical expenditure available that often goes ignored by special needs families: medically necessary capital improvements. 

Overview of the Medical Expense Deduction 

According to the IRS, only individuals itemizing their deductions on their federal individual income tax returns can claim a medical expense deduction. Unreimbursed medical expenses are deductible only to the extent they exceed 7.5% of a taxpayer’s adjusted gross income (AGI) through 2020. The 7.5% AGI threshold for the medical expense deduction was reinstated with the Tax Cuts and Jobs Act of 2017 (from prior law’s 10% of AGI) for 2017 and 2018 and was retroactively extended thru 2020 by The Taxpayer Certainty and Disaster Relief Act of 2019. Alternatively, parents who are eligible to participate in tax-advantaged plans through work for funding medical expenses, such as flexible spending accounts or health savings accounts, can set aside limited amounts of money to finance medical care expenses on a pre-tax basis while bypassing the AGI limitation. Flexible spending account pre-tax contributions are limited to $2,750 for 2020. 

The Overlooked Deduction: Capital Expenditures as a Medical Expense 

Under most circumstances, capital expenditures aren’t permitted as a medical expense deduction. As a rule, assets used in a trade or business or held for the production of income are depreciated or amortized over time. Capital expenditures incurred for personal medical expenses are not depreciable nor amortizable. However, a medical expense deduction is available when the capital expenditure is made primarily for the medical care of the taxpayer, the taxpayer’s spouse, and/or the taxpayer’s dependents. To secure a current medical expense deduction for a capital expenditure, the cost must be reasonable in amount and incurred out of medical necessity for primary use by the individual requiring medical care. 

Qualifying capital expenditures for medical expense deductions fall into two categories. First, expenditures improving the taxpayer’s residence while also providing medical care (e.g., a central air conditioning system for an individual suffering from a chronic respiratory illness). Second, expenditures removing structural barriers in the home of an individual with physical limitations (e.g., construction costs incurred for an entrance ramp, widening doorways and halls, customizing bathing facilities, lowering kitchen cabinets, and adding railings). 

Capital expenditures in the first category are deductible only to the extent that the cost exceeds the increase in the property’s fair market value as a result of the capital expenditure. However, expenditures incurred in the second category are fully deductible under the presumption that there is no increase in the property’s value as a result of removing a physical barrier. Further, the entire cost of special equipment acquired to assist an individual with physical limitations is deductible. The following examples illustrate expenditures in both categories: 

Example One 

This past year, Thomas was injured in a severe skiing accident. Thomas sustained a disabling leg injury, which requires him to spend most of his time in a wheelchair. His physician recommends that he install an elevator in his home to alleviate the pressure on his knees from walking up and down stairs. During the year, Thomas made the following expenditures: wheelchair: $3,500, elevator: $19,000, operational and maintenance costs incurred with the elevator: $2,800, and entrance ramp and door modifications: $8,500. According to appraisers, the home increased in value as a result of the elevator by $5,000. As a result, Thomas has a $28,800 medical expense deduction before considering AGI limitations for 2020. 

Example Two

In 2020, Jane, a single mother with AGI of $100,000, fully supported her 20-year-old daughter living with her. Her daughter has no income for the year and was properly claimed as Jane’s dependent. During the year, Jane installed a central air conditioner at a cost of $17,000, which her physician said was required in caring for the daughter’s asthma. After installation, Jane’s home increased in value by $7,000, allowing for a deduction of $10,000 for the central air conditioner. In addition, Jane incurred the following medical expenses in 2020: prescribed drugs: $500, physician expenses: $1,000, and unreimbursed health insurance premiums: $3,000. As a result, Jane has a medical expense deduction of $14,500 before considering AGI limitations for 2020 and $7,000 after subtracting 7.5% of her AGI ($100,000). In addition, if Jane’s utility bills increased $150 monthly after installing the central air conditioner system, her medical expense deduction would increase to $8,800 after the AGI limitation. 

Under either category, costs incurred to operate or maintain the capital expenditure (such as increased utility expenses and maintenance costs to operate the elevator as illustrated in both examples) are deductible currently as medical expenses as long as the medical reason for the expenditures continues to exist. 

Conclusion 

Although many of families caring for those with special needs are aware of the medical expense deduction for special schools and education, the deduction for a capital expenditure for medical care is often overlooked. As illustrated, this deduction alone can result in saving thousands of tax dollars.

You hear the stories of black men and women navigating poverty inside America’s densest projects; the malnutrition, the financial stress, the entrenched inequalities in our system that eventually boil over. They become fearful of the cops, of creditors, even of each other while fighting on the streets for survival. 

Make no mistake – that’s what this is, not what it’s become. I lived this life as a kid in the segregated South – and five decades have not solved these injustices. Fifty years of powerful people thinking they must always fill the sting of silence with their own words, when it’s not their void to fill. 

America now lays bare its weakness in this moment of immense pain. It’s spilled over into the streets of cities and towns across this nation – an anger so deep-rooted leading to glass sitting on sidewalks framing defaced storefronts. I echo Dr. Martin Luther King Jr. in urging those protesting to remember the message they want to deliver. He said, “Darkness cannot drive out darkness; only light can do that. Hate cannot drive out hate; only love can do that.” 

Put down the rocks, and pick up the megaphones. Amplify your Instagram audiences. Rally the voices of black churches, and the motivations of black activists. Mobilize a communications effort as wide as these protests can stretch. While America is still largely staying at home, there’s a captive audience bigger than ever before. 

I really hope our nation is ready to listen. But, more importantly, I hope that those marginalized and mistreated for so long are heard and understood. Because this is bigger than a commitment to hiring a few more people of color or setting up a diversity council or cloaking the systemic struggle black people face with a program that means well, but stops a few steps short of feeling uncomfortable. 

I’ve had a tough talk with myself over the last few days. Is The College doing enough? Yes, our scholarship programs lift up people of color looking for valuable, and valued, careers in financial services. Yes, The College’s Conference of African American Financial Professionals will celebrate its 15th year in 2020 as a venue for black men and women to support each other, share stories and strategies, and lift up their communities. 

Yet, we can all do more to create equal opportunity in this world, to establish a fairness doctrine that spurs economic growth from the bottom-up, to re-assess how we’ve lived up to Dr. King’s ideals. We honor his birthday, but how’s that anything close to enough? 

As a nation, we start conversations on race I don’t think we ever intend on finishing. This time must be different. The College will hold itself and its partner companies accountable for affecting real change through real dialogue. A message co-signed by The College, ACLI, NAIFA, AALU/GAMA, and LIMRA was a strong step in setting the tone. 

And, more than anything, we have the opportunity and responsibility to become a platform for progress, where the communities we serve drive the ideas and actions we take. For far too long, pontificators have read some words on race, offered their thoughts and prayers, and America moved on. That cannot continue.

While the CARES Act was a necessary provision to mitigate short-term financial pain, there’s also a real fear the allowances it offered may significantly impact individuals’ long-term retirement prospects. 

However, not all is lost, because retirement planning shouldn’t be the Wild, Wild West. Financial professionals are the buffer between irrational thought and financial planning decisions. The American College of Financial Services plays an important role in this relationship, educating financial professionals on many facets of retirement planning, including areas severely impacted by today’s public health crisis. 

Should my clients claim Social Security early? How can I talk to them about avoiding retirement plan withdrawals unless necessary? Where can they park money as a safe haven until the market recalibrates? 

Knowledge helps provide the expertise and confidence needed to answer these questions, and many more like them. This crisis will hit retiree and near-retiree clients differently depending on the makeup of their portfolio and their familial needs. Is long-term care on the table? Do they need to have an estate planning conversation? Again, there’s so much to know, and The College wants to be both the conveyor of that information and the platform for the big, impactful discussions the profession is having. 

There are several ways The College is living its mission in the retirement space during this unprecedented crisis: 

• We held four-part webcast series, Financial Planning During COVID-19, which included a full hour on tax and retirement planning strategies, as well as another session on reframing a goal-based wealth management plan under market stress.
• We continue to provide relevant, timely information through the Retirement Planning Series webcasts presented by the New York Life Center for Retirement Income. A recent session detailed Social Security’s perilous solvency. We assembled a lineup of thought leaders, including The College faculty Steve Parrish and Wade Pfau, along with Kent Conrad, former U.S. Senator and co-chair of the Bipartisan Policy Center Commission on Retirement Security and Personal Savings.
• Our esteemed faculty has been busy talking to journalists across America, and have been featured in over 200 stories reaching 792 million eyes through publications like The New York Times, The Motley Fool, Bankrate, Kiplinger, and so many more.
• We also surveyed Retirement Income Certified Professionals® (RICP® credential holders) on how their clients were handling market volatility. As you’d expect, the results of our second survey showed more client concern than a month earlier, yet a theme was still apparent: clients remained calm if advisors proactively communicated the importance of proper planning during market imbalance. 

We’ve been busy, but we’re nowhere close to finished. Providing a variety of free content through webcasts, interviews, surveys, and guest articles is one way to highlight the expertise of our brilliant retirement-focused faculty, led by RICP® Program Director Wade Pfau. We have a team dedicated to the data, cognizant of its framing in today’s environment, and uniquely focused on how behavior drives many of these important decisions. Retirement planning looks far different today than it did after the 2008 recession. I’m excited to determine how The College can play a part in how corporations, think tanks, and the federal government act on these issues. There will be another CARES Act. There will be emergency legislation that puts short-term interests over long-term outlooks. It’s a financial advisor’s duty to cut through the noise with sound advice and expertise, and The College will continue to play a leading role by delivering accessible, engaging, impactful insight and education.

The New York Fed published research on this topic by studying heterogeneity in economic data, to describe how the recent economic impacts differ by race and gender. To study heterogeneity is to study variance. Economic analysis is often based on averages, but an “average” or “typical” person often doesn’t capture the experience of minority populations. So, we need a different approach to studying the numbers, and related, to providing financial services. 

The Fed data tells a complex story. While the racial wealth gap narrowed between 2016 and 2019, economic insecurity among Black households remains, and is likely to worsen. Recessions historically, and today, have a larger impact on Black populations, and those communities recover more slowly. For instance, labor force data reveals divergence in Black and white labor force participation rates. While the situation during the pandemic has been bleak for all workers, there's divergence in the data: the unemployment rate rose significantly more for Black workers between the shutdowns of February to April 2020, and the recovery for white workers has occurred more quickly so far. 

The data story continues. It’s been well documented by multiple sources that COVID-19 case counts are higher among communities of color. But why? The NY Fed analysis of data from the early months of the virus’ spread reveals several factors play a role, to differing degrees. These include higher rates of essential workers, indoor crowding on public transportation as well as in homes, and access to healthcare, including pre-existing co-morbidities. The researchers determine that while some causes that contribute to disparate impacts, such as co-morbidities, are more complex to mitigate, others, like access to health care and home crowding, are amenable to policy intervention. 

Looking forward, how are we to address equality in economic recovery? And what's the role of business in the recovery? Several of my colleagues at The American College of Financial Services will offer ideas on these challenges in a multi-part insights series to be published over the coming weeks in the American College Center for Economic Empowerment and Equality®'s Resource Center.

What You Can Expect 

• Steve Parrish, JD, RICP®, CLU®, ChFC®, RHU®, AEP® writes about the disparate impacts of tax policy and whether the time is ripe to consider tax reform. He reflects on hot topics in tax, such as carried interest and the earned income tax credit, and their interplay with economic inequality. Professors Sophia Duffy, JD, CPA and Dan Hiebert, PhD, CFP® will discuss the role of financial advisors in addressing inequality. 
• On March 24, Duffy highlighted that financial planning is not just for the rich – in fact, low-income earners need strategies to protect their income and manage inter-generational wealth. She'll offer some guidance for such strategies. 
• On April 7, Hiebert focused on the small business sector – which comprises over 90% of businesses – and how minority-owned firms have fared poorly during the pandemic. He'll advocate that small business advisory services can complement individual financial planning strategies, particularly as many entrepreneurs rely on personal resources in business formation and sustainability. 

One conclusion to draw from these analyses is that those areas and people that are least able to withstand economic shocks, because of vulnerabilities prior to the pandemic, have felt the greatest impact and will likely experience the slowest recovery. Moreover, communities of color are also likely to trust the financial services sector, either because of past scandals which have disproportionately impacted them, or a dearth of products and services that are culturally relevant and addressing their needs. 

The financial services sector has a predominant role to play in helping underserved communities by narrowing the wealth gap and promoting economic justice.

This conversation came back to my mind after reviewing a blog series "Understanding the Racial and Income Gap in COVID-19" published by the Federal Reserve Bank of New York. This four-part series focused first on the role of mediating variables—such as insurance rates, co-morbidities, and health resources; then public transportation, and home crowding in the second post; social distancing, pollution, and age composition in the third; and finally the role of employment in essential services in explaining this gap. This series captured the point that if you think there’s a racial and income gap now, it’s likely to get worse because of the COVID-19 pandemic. This leads back to the family conversation on taxation.

Tax law discriminates. Presumably much of this discrimination is meant to fulfill salutary aspirations such as economic growth, encouraging retirement savings, and supporting low-income earners. Despite these goals, and according to the NY Fed, there’s a worsening racial and income gap. Now may be a good time to reexamine the value of these discriminatory tax provisions. Do they help – or do they hurt? Do they lessen the gap or exacerbate it?

Consider the wealthy. There are some tax rules that clearly favor the rich. An example includes carried interest for a general partner of an investment fund (think Warren Buffett declaring that he is in a lower tax bracket than his secretary). Carried interest, though a form of compensation for the general partner, is taxed at preferential capital gains rates. The argument is that general partners are similar to other entrepreneurs who are allowed to treat portions of their return as capital gains. A more recent example of a tax advantage targeted at the wealthy is the qualified opportunity zone tax deferral. In return for investments in “opportunity zones” (Census tracts identified for economic development), investors receive several tax benefits, including the ability to pay as little as zero taxes on potential profits. Before assuming this is one more example of the rich helping the rich, consider that this law was co-authored by Senator Cory Booker, D-N.J., who sees this tax incentive as a way to help disadvantaged communities of color grow through economic development.

Next consider the low-income earner. They, too, are the beneficiary of special tax provisions. For example, the IRS deems the earned income tax credit (EITC) “one of the Largest Antipoverty Programs,” with the average EITC amount being $2,461. This provision, along with the child care credit, lifted about 5.6 million people out of poverty, including three million children.

Another example of a significant tax break for rank-and-file earners is the saver’s credit, a non-refundable credit meant to incentivize low- and moderate-income taxpayers to make retirement contributions to IRAs and 401(k)s. This credit potentially allows a maximum in any given year of $1,000 on a retirement contribution of $2,000 (double those numbers for married filing jointly status). The challenge for low-income earners, however, is the complexity of these various tax breaks and these taxpayers’ limited access to financial advice. For example, determining eligibility for EITC requires a taxpayer to make over 20 separate determinations. This may explain why 20% of those eligible for the EITC fail to claim it. Similarly, lack of awareness of the saver’s credit likely contributes to the fact that only about 12% of eligible taxpayers actually claim it. 

What To Do 

Since it appears that tax policy is once again on the table with the new Congress and Biden Administration, this may be an appropriate time to consider tax reform. The first step in this process is typically undertaken through tax scoring. The score for any tax proposal is the difference between how much tax revenue the federal government is estimated to collect (usually over 10 fiscal years) compared to the revenue the government would otherwise have collected if the law had not been changed. 

Once scored, the debate then turns to whether the proposal will support government objectives such as economic growth, elimination of poverty, or, per the NY Fed’s blog series, narrow the income and racial gap exacerbated by COVID-19. Yet, there's an opportunity to go further. An added consideration should recognize human attitude and behavior. Tax reform should factor in: 1) how complex the law is to understand and 2) the law’s perceived degree of fairness to taxpayers. It’s not enough to say the tax provision will generate revenue and address the government’s targeted objective. It must also address what the provision means to the taxpayer – how it will be understood, and implemented. 

Consider a proposal in discussion that addresses Social Security underfunding. Since Social Security is largely funded through payroll taxes, an increase in payroll taxes has been suggested. The idea is to retain the current 6.2% FICA rate on wages up to the income cap ($142,800 in 2021), and then have the FICA rate reappear when income exceeds $400,000. While this proposal may score well for revenue purposes and help fund additional benefits for low-income retirees, it may fail the two behavioral tests I suggested above. First, it’s a form of a “tax donut” which is likely to confuse workers paying into FICA. You pay a tax; then you don’t; then you do again. Some refer to this as a 12.4% tax on the affluent – which it’s not. The second concern with this proposed tax is the perceived lack of fairness this idea may represent to both low- and high-income taxpayers. For high-income earners, this may be viewed as a blatant wealth transfer. 

Those making in excess of $400,000 will likely have maxed out how much Social Security benefit they receive at retirement. So, in their minds, they’re paying an additional 6.2% of earnings for no additional increase in benefits. Those in low-income brackets will likely cry foul as well. While they pay a 6.2% tax on all of their wages, high-income individuals (i.e. those making in excess of $142,800) pay a lower effective rate for their Social Security benefit because of the income cap. The fact that an additional tax will be imposed on those making astronomical wages may sound merely punitive rather than productive. Even the U.S. President’s salary doesn’t exceed $400,000. 

Perhaps we should not take a bad situation (hard to understand tax provisions that are underutilized) and make it worse. We’ll likely see a healthy debate in Congress over targeted new tax laws, and many Americans hope these proposals will address the ever-increasing income and racial gap. However, let’s keep the taxpayer in mind during this debate. These changes, no matter how laudatory, should be understandable and perceived as fair. Stated differently - let’s make it more likely that any family members going into the bar will argue about sports instead of tax policy.