Special Needs Planning Insights
Tax Strategies for Special Needs Families
Below I’ve outlined four main areas to focus on when assessing your tax situation. A Certified Public Accountant (CPA) or a tax adviser who is familiar with special needs planning is an important person to have on your financial team. This tax professional can help to ensure you’re taking advantage of all tax deductions that you are eligible for and that you maintain them in the future.
Medical Expenses
As of 2019, an itemized deduction is available for medical expenses greater than 10% of Adjusted Gross Income (AGI). For many this is a large hurdle to overcome, but for someone with costs related to a disability or special need, you may be spending double the amount of a typical taxpayer. The key is to be diligent in tracking your medical expenses, obtaining documentation of physician recommended expenses, and planning ahead with your CPA.
Examples of deductible medical expenses are: prescription drugs, over the counter insulin and/or syringes, dental costs, psychological or psychiatric services, premiums paid for Medicare Part B, and the cost of guide dogs, wheelchairs, etc. Keep in mind that you cannot deduct expenses for non-prescribed medicines, drugs, vitamins, or health foods.
Some medical expenses that are deductible are often overlooked. These include costs related to special schools and institutions, capital expenditures, medical conferences and seminars, nursing home expenses and long-term care costs, and medical travel and transportation.
- Special schools and institutions: If your child attends a qualifying special school, you may deduct the entire unreimbursed cost as a medical expense. In addition to tuition, the costs can include lodging, meals, transportation, incidental education costs, supervision at the school, treatment, and training. Private tutoring expenses may also qualify.
- Capital expenditures: If a physician recommends that a capital improvement should be made to your home for medical reasons, you may deduct the cost in excess of the increase in your home’s fair market value (FMV). If the recommendation is to remove structural barriers, the full cost may be deductible. An example is installing a lift for someone with a physical limitation. The full cost of the lift and installation may be deductible. The ongoing costs to maintain it may also be deductible in subsequent years, if a medical reason still exists.
- Medical conferences and seminars: If your doctor recommends that you attend sessions to learn more about your dependent’s medical condition in order to assist them, the cost of attending these conferences and seminars, including transportation, is deductible. Lodging and meal costs are not.
- Nursing home and long-term care: Expenses incurred in a nursing home or long-term care (LTC) facility are deductible if you are chronically ill or the facility is primarily for medical care. In most cases, facilities primarily provide custodial care. The medical care component specifically may be deductible if separately stated on the bill. You may also deduct a portion of the cost of LTC insurance premiums.
- Medical travel and transportation: The cost of travel to a medical facility, not including trips to improve general health, is deductible. If you use your own personal automobile, you may deduct a certain amount based on miles traveled. Unlike for medical conferences and seminars, a portion of lodging costs for you and one other person may be deductible, if an overnight stay is required. The meals during your stay, though, are not.
In addition to tracking expenses for a deduction, you should consider a Flexible Saving Account (FSA) to set aside pre-tax money to directly lower your taxable income. This account is used to cover medical expenses throughout the year. Keep in mind that the full account balance must be used by year end.
Impairment Related Work Expenses (IRWEs)
You may also deduct expenses that are necessary for you or your dependent with special needs to be able to work. Examples include attendant care services required to prepare for work or required while you work, a reader if you are blind, transportation costs, service animals, medical devices, medication, or other expenses that are necessary in order to do your work satisfactorily. This deduction is considered a business deduction and is not subject to the 10% of AGI limitation.
Retirement Plan and IRA Distributions
If you withdraw from a qualified retirement plan or Individual Retirement Account (IRA) before age 59 1/2, your distributions are subject to a 10% penalty. A penalty waiver may apply, if you meet the definition of disability from the Social Security Administration and are receiving Social Security Disability (SSDI).
A penalty waiver may also apply if you have substantial medical expenses. If distributions are used for medical care, the penalty is waived on amounts less than or equal to your allowable medical expense deduction (excess of 10% of AGI). This holds true whether you are eligible to itemize your deductions or not. Before withdrawing from a retirement plan, you should speak with your CPA and financial planner to determine the best strategy.
Refundable and Non-refundable Credits
There are two refundable credits you may be able to take advantage of in 2019: The Earned Income Tax Credit (EITC) and the Child Tax Credit. Both are subject to income phaseouts.
- The EITC amount depends on your earned income and the number of qualifying children you have.
- The Child Tax Credit applies to each qualifying child, under age 17. There is also a nonrefundable credit for a qualifying dependent, such as a child over 17 years old or a parent.
There are two non-refundable credits that may also benefit you in 2019: The Child and Dependent Care Credit and the Adoption Expense Credit. Again, both are subject to income phaseout.
- The Child and Dependent Care Credit is designed to relieve the burden of two-earner families who incur dependent care expenses. A qualifying dependent is either under age 13, any age if the person is physically or mentally incapable of self-care and qualifies as a dependent, or a spouse who is physically or mentally incapable of caring for themselves.
- The Adoption Expense Credit may be claimed per child. For a qualified adoption of a child under age 18, expenses related to legal fees, court costs, and other related costs may be eligible for the credit. For an adoption of a child with special needs, you may receive the full credit regardless of expenses.
There are a few other items that are important to remember when reviewing your tax strategy. If you are elderly or blind, you may claim an additional amount for your standard deduction. If you have high investment income, such as a substantial realized capital gain, you may be subject to the Medicare Surtax. Though the threshold was increased, you may also be subject to Alternative Minimum Tax (AMT) after certain deductions are added back to your income.
Working closely with your CPA and CERTIFIED FINANCIAL PLANNER™ can help you prepare in advance to create a tax strategy that accounts for all these factors, which may ultimately help to alleviate some of the high costs you may be incurring throughout the year.
If you need help with tax planning for special needs, Modera advisers who specialize in this area are available to help you. To learn more, please contact us at advice@moderawealth.com.
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Special Needs Planning Insights
Special Planning for Individuals with Special Needs: An Inside Look
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.
Special Needs Planning Insights
An Overlooked Deduction for Families Caring for Those with Special Needs
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.
Special Needs Planning On-Demand Webcasts
Income Tax Planning for Families Caring for Children with Special Needs
Special Needs Planning On-Demand Webcasts
The ABLE Act: An Additional Tool for Individuals With Special Needs
Special Needs Planning On-Demand Webcasts
Increasing Tax Awareness and Examining "Dependents" and the "Kiddie Tax"
Special Needs Planning On-Demand Webcasts
Tax Traps and Financial Nuances for Families Caring for Individuals With Special Needs
Special Needs Planning On-Demand Webcasts