PARENTS OF CHILDREN WITH SPECIAL NEEDS
ENTITLED TO INCOME TAX BENEFITS
Sharp Bratton Attorneys at Law
208 White Horse Pike, Haddon Heights, New Jersey 08035 – 856-546-5666
By Appointment Only:
993 Lenox Drive, Suite 200, Lawrenceville, New Jersey 08648 – 609-219-1680
1201 New Road, Suite 339, Linwood, New Jersey 08221 – 609-926-0868
PARENTS OF CHILDREN WITH SPECIAL NEEDS ENTITLED
TO INCOME TAX BENEFITS
Families with a special needs child are faced with an array of concerns. The current and
future care issues are paramount. Significant time is spent in arranging for and delivering care.
Since so much effort is put into dealing with the day to day challenges, planning for the financial
security of the household and child can often take a backseat. The planning phase includes
proper investment of family resources, executing legal documents such as wills and spec ial needs
trusts, applying for guardianship and obtaining information on public benefit programs.
Unfortunately, many families are unaware of significant tax benefits which would allow them to
retain a larger share of their hard earned income. This article describes in detail the current
Federal income tax deductions and credits available to parents of children with special needs.
From the outset, it is important to keep in mind the difference between a tax deduction
and a tax credit. The amount of the financial benefit to be derived from a deduction depends
upon the individual’s marginal tax rate which will range between 10 % to 28%. A tax credit is
significantly more beneficial since the credit is a dollar for dollar reduction in tax liability.
MEDICAL EXPENSE DEDUCTION
The medical expense deduction is designed to mitigate the economic effect of the high
cost of medical care.
The general rule is that taxpayers who itemize their deductions on Form 1040, Schedule
A may be entitled to deduct eligible medical expenses if the expenses exceed 7.5% of adjusted
gross income (AGI). The taxpayer is well advised maintain thorough records so as to document
the deductions with receipts, prescriptions and appraisals.
Examples of expenses that qualify for the deduction are fees for therapeutic and
behavioral support services, prescribed vitamin therapy, prescribed equestrian therapy,
installation of special equipment in the home, and diagnosis and treatment of an illness or
condition. Special equipment is deductible if the main purpose for the equipment is medical
A permanent improvement that increases the value of property may be treated in part as
a medical expense. For purposes of determining the amount that is deductible, the cost of the
improvement is reduced by the increase in the value of the property. The IRS has ruled that the
following improvements do not add value to a property: entrance and exit ramps, widening
doorways or hallways, modifying stairways, adding handrails or grab bars, lowering or
modifying kitchen cabinets. The cost of a home swimming pool, hot tub or swim spa is
deductible if a physician prescribes swimming, water exercise or physical therapy as treatment
for a medical condition. Of course, the items referred to in the previous sentence will no doubt
increase the value of the property. Operating and maintenance costs such as water, electricity,
cleaning and chemicals for the capital asset may be deductible.
The Service has specifically ruled that the cost of swimming or dancing lessons does not
constitute a medical expense
Transportation costs primarily for and essential to medical care qualify as a deductible
medical expense. The actual fare for a taxi, bus, train, or ambulance can be deducted. If a vehicle
is used for medical transportation, the actual out–of–pocket expenses (such as gas and oil) may
be deducted. In the alternative, the taxpayer may opt to deduct the standard mileage rate. (For
2009, the rate is 24 cents per mile if the transportation is for medical purposes.) Under either
method, tolls and parking fees are deductible.
EDUCATION AS A MEDICAL EXPENSE
The Internal Revenue Code does not provide a deduction for the cost of traditional
education. However, under IRS Reg. 1.213-1 (c) (1)(v), a deduction is permitted for the cost of
attending a “special school” for a mentally or physically handicapped person. The principal
reason for attendance must be to alleviate the child’s handicap and a physician must recommend
a special school based upon the diagnosis of a disorder. A regular school can be classified as a
“special school” for a particular individual as long as the school has a special curriculum for a
The availability of this deduction has been addressed in a number of Private Letter
Rulings (PLRs) which are discussed below. While PLRs are not precedential, they do provide an
indication of the policies and predilections of the Service.
In PLR 200521003, the IRS emphasized that in determining deductibility of tuition, the
focus must be on what special services the school actually provides the student. A deduction
was allowed for the education expenses for a dyslexic child since the curriculum was designed to
enable the child to deal with medical handicaps and to move on to study at a regular school
which the Service recognized is the “essence of special education”.
PLR 200729019 recognized that a school can be special for one student and not another.
The IRS emphasized that where a school offers “ordinary” education in addition to special
education, it must be incidental to the special education provided. The staff at a school had
designed a self-contained program to enable the special needs student to compensate for and
overcome diagnosed medical disorders so that she could be prepared to succeed in a college
environment. Expert evidence was submitted in the form of a neuro psychological report which
stated that the student needed a support program and counseling if she were to attend college.
The taxpayer who sought the ruling set forth in PLR 8616069 was not so fortunate. The
IRS found that the principal reason the taxpayer’s child was attending the school in question was
a concern over his reading ability and that medical care was not the primary concern. Therefore,
the school did not qualify as “special” and the deduction was denied.
In Rev. Rul. 70-285 and 78-340, the IRS focused on educational activities as opposed to
the type of institution. The Service approved the deductibility of fees paid to a specially trained
teacher for private tutoring. The tutor provided sign language instruction, speech therapy,
remedial reading instruction and taught lip reading. The cost of related books and material were
deductible as well.
Indeed, the taxpayer has an easier burden if the school specially services those with
physical disabilities such as deafness or retardation. The same cannot be said of facilities serving
the mentally or emotionally disadvantaged.
CONFERENCES AND SEMINARS
Rev. Rul. 2000-24 stands for the proposition that a deduction is permitted for medical
conferences and seminars. Travel expenses and registration fees are deductible; however, there
is no deduction allowed for meals or lodging. The medical threshold of 7.5% is applicable.
The topic of the conference or seminar must relate to the child’s specific medical
condition as opposed to addressing issues of general health and well being. It is prudent to
obtain a written recommendation from the child’s physician that the material presented will be
beneficial from a medical point of view.
The primary purpose of the trip must be to attend the conference and not to vacation or
visit family members or friends. If the individuals do find time to socialize or have some fun, the
cost of these activities is not deductible.
IMPAIRMENT RELATED WORK EXPENSES
Handicapped individuals are now a vital part of our country’s work force. However, the
handicapped worker may need assistance to enable her to complete required duties. Relief is
provided under IRC Sec. 67 (d) which permits a business deduction for unreimbursed attendant
care services at the place of employment. The services are characterized as an “ordinary and
necessary business expense”; therefore, the deduction may be claimed to the extent that the
expenses exceed 2% of the taxpayer’s AGI. (Note that the 7 ½% threshhold for medical
expenses does not apply.)
To be eligible for the deduction, the individual must be “handicapped” which is defined
as “a physical or mental disability or impairment which is a functional limitation to employment
or substantially limits one or more major life activities”.
A three prong test must be satisfied in order for an expenditure to qualify for the
deduction: It must be (1) Necessary for the taxpayer to do his or her work satisfactorily; (2) For
goods and services not required or used, other than incidentally, in her personal activities, and (3)
Not specifically covered under other income tax laws.
The deduction is claimed on Form 2106 or 2106- EZ.
EXEMPTION FOR DEPENDENTS
For purposes of calculating Federal income tax liability, each taxpayer is entitled to a
personal exemption for herself, her spouse, child or other dependent. The personal exemption is
allowed in the form of a deduction against the taxpayer's income in computing tax liability.
For 2009, the exemption is set at $3650. However, high income earners may not be
entitled to the credit. It is subject to a phase out when a single taxpayer’s adjusted gross income
exceeds $166,800 and is unavailable when the adjusted gross income reaches $289,300. The
phase out for a married couple filing jointly begins at $250,200 and the credit is unavailable for
those whose adjusted gross income reaches the $372,700 mark.
A five prong test must be satisfied in order for the child or dependent exemption to be
available. (1) The person must be a “qualifying relative” or member of the taxpayer’s household
for the entire year. A qualifying relative is a son, daughter, stepchild, foster child or descendant,
brother, sister, half brother, half sister, stepbrother, stepsister or descendant. The person must
meet the age test or be totally and permanently disabled. (A nondisabled person ceases to be an
eligible dependent in the year in which the age of 19 is attained or in the year in which the age of
24 is attained if he or she is a full time student for at least 5 months during the taxable year.) (2)
The dependent’s gross income cannot exceed the exemption amount. (3) If the dependent is a
child, the child cannot have provided more than half of his or her own support for the year. If
another qualifying relative is the dependent, the taxpayer must have provided more than half of
the person’s total support. (4) A married dependent is not permitted to file a joint return for the
year. (5) The dependent must be a citizen or resident of the United States or resident of Canada
Those who wish to explore these rules in greater detail can refer to Section 151 of the
Internal Revenue Code as well as the regulations or IRS Publication 501.
EARNED INCOME TAX CREDIT
The Earned Income Tax Credit (EITC) is a refundable tax credit available to low to
moderate income earners. The taxpayer seeking to qualify must meet certain requirements and
file a tax return, even though he or she would not be otherwise obligated to file a return based
For tax year 2009, a claimant with one qualifying relative can receive a maximum credit
of $3,043. A claimant with two qualifying relatives can receive a maximum credit of $5,028 and
those with three or more qualifying relatives can receive a maximum credit of $5,657.
The credit is available only if the taxpayer’s adjusted gross income does not exceed the
following threshholds. For single taxpayers, the phase out begins once annual adjusted gross
income reaches $16,420 and the credit is unavailable for those with AGI of $35,463 or more per
year. For a married couple filing a joint return, the phase out begins once annual AGI reaches
$21,420 and the credit is unavailable for those with AGI of $40,463 or more per year. The credit
may not be claimed for those who file “married filing separately”. Therefore, in order to be
eligible for the credit, a separated married person must file as head of household.
The “relationship” test must also be satisfied. In order to be a “qualifying relative”, he or
she must fall within one of the following categories: biological, adopted, step or foster child (or
a descendant). Brothers, sisters, half brothers, half sisters, stepbrothers, steps isters (or their
descendants) also qualify. The qualifying relative must have also resided with the taxpayer for
more than six months during the calendar year.
Finally, the qualifying relative must either meet the “age” test or be permanently and
totally disabled. The age test for these purposes is the same as that set forth in the previous
section regarding exemptions for dependents. The disability test is satisfied so long as the child
cannot engage in substantially gainful activity and the condition is expected to last continuously
for at least a year or can lead to death.
Readers can refer to IRC Section 32 or IRS Publication 596 for additional information.
CREDIT FOR SPECIAL NEEDS ADOPTION EXPENSES
Families who adopt a child with special needs are eligible to claim a federal adoption tax
credit under IRC Sec. 23. In order to be eligible, the child must be a United States citizen or
resident. The State must have determined that the child cannot be returned to the home of his or
her parents. Furthermore, the State must have determined that the child has a specific factor or
condition (such as a medical condition or physical, mental, or emotional handicap) which makes
it reasonable to conclude that it would not be feasible to place the child with adoptive parents
without providing adoption assistance.
In 2009, the amount of the credit is $12,150 no matter how much was spent on the
adoption. In other words, there is no need to incur or document expenses. The limit is per child
and not per year. To claim the credit, Form 8839 must be filed along with Form 1040.
Not everyone is entitled to use the full amount of the credit. Families with adjusted gross
income in excess of $222,180 in 2009 are not permitted to take advantage of this tax benefit.
Families with income below $182,180 may claim the full credit. Those in between are entitled to
a partial credit. The amount of the credit that may be used in a given year is limited to the
taxpayer’s Federal income tax liability.
If an expense is paid or incurred before the tax year in which the adoption becomes final,
the credit is allowed in the tax year subsequent to that in which the expense was paid or incurred.
If the expense is paid or incurred during or after the tax year in which the adoption be comes
final, the credit is allowed in the tax year in which the expense is paid or incurred.
In the event that the taxpayer is unable to utilize the entire credit in a given year, the
credit in excess of the tax liability in that year can be carried forward to the next tax year. Excess
adoption credits can be carried forward for five years.
QUALIFIED DEPENDENT CARE ASSISTANCE
The general rule is that payment for babysitting or daycare of a child so that a person can
maintain employment does not constitute a deductible business expense under IRC section
162(a). However IRC section 21 provides tax relief to some families by allowing a limited credit
for certain expenses related to the care of a “qualifying individual”.
Under the code, the test is met if the individual is (1) a dependent under age 13 for whom
a dependency exemption may be claimed, (2) a dependent of any age who shares the same
principal place of abode as the taxpayer and is physically or mentally incapable of caring for
herself, or (3) a spouse of any age who shares the same home as the taxpayer and is physically or
mentally incapable of taking care of herself.
The types of expenses for which a credit may be claimed include regular child care
services, after-school programs and summer camps. A payment to a relative will qualify so long
as the relative is not a dependent of the taxpayer. The cost of overnight summer camp does not
The amount of the credit allowed is based upon the income level of the individual making
the claim. The credit ranges from 20 to 35 percent of the qualifying expenses. Taxpayers with an
AGI of $15,000 or less use the highest applicable percentage of 35%. For taxpayers with an
adjusted gross income over $15,000, the credit is reduced by one percentage point for each
$2,000 of adjusted gross income (or fraction thereof) over $15,000. The minimum applicable
percentage of 20% is used by taxpayers with an AGI of greater than $43,000. If the claim is
made for one qualified dependent, the maximum credit is $3,000 per year. If there are two or
more qualified dependents, the credit is limited to $6,000 per year.
Those who file Form 1040A will complete Schedule 2 in claiming the credit. Taxpayers
using Form 1040 attach Form 2441 to disclose the eligible expenses. Form 1040EZ may not be
used by those seeking to take advantage of this tax benefit. The rules are set forth in great detail
in IRS Publication 503.
Most special needs children will not have a source of income until they turn age 18 and
may then qualify for Supplemental Security Income (SSI). SSI benefits are not included in gross
income and are therefore not taxable.
In some circumstances, a child became disabled as the result of being a victim of a
tortfeasor and subsequently receives compensation for damages suffered. IRC Sec. 104 (a)
provides that settlements and judgments relating to personal injury or sickness are not taxable.
However, any settlement or judgment characterized as punitive damages is subject to Federal
If a parent failed to take advantage of available tax benefits in prior years, all is not lost.
A claim for a refund for a tax overpayment can be filed on Form 1040X which in essence
corrects the original tax forms. The claim must be filed within three years from the original
deadline of the tax return. The taxpayer must state the reason that the refund is due and supply
Another crucial point is that where an insurance company or school district reimburses
the taxpayer for an expense that was deducted on a prior tax return, she is required to declare the
reimbursement as taxable income in the year received.
Individuals are well advised to seek out the services of a qualified professional to guide
them through the complex maze of the tax system. Otherwise, they may inadvertently deprive
themselves of important tax benefits to which they are certainly entitled.