Tax Benefit Checklist for Families Caring for Special Needs Children

Unique tax benefits are available to families with individuals who have special needs. A checklist compiled by Thomas M. Brinker, Jr., a professor of accounting at Arcadia University in Pennsylvania, of some potential tax benefits that could be available to families who care for a special needs child, was recently published by the Academy of Special Needs Planners and is replicated here.

Following is a summary of some of the deductions that Prof. Brinker, who is himself the parent of a special needs child, highlights:

Deducting the cost of a Special School or Institution

What is a Special School?

Schools with programs to “mainstream” children with neurological disabilities (i.e., autism spectrum disorders)

What is deductible?

• Lodging
• Meals
• Transportation
• Incidental educational costs provided by the institution
• Costs of supervision, care, treatment, and training

 When can regular Schools be classified as a “Special School” for an individual?

Where School has special curriculum for neurologically disabled individual

Private tutoring by a specially trained teacher

Therapeutic and behavioral support services (see Revenue Rulings 70-285 and 78-340)

Special education for dyslexic children

Provided program enables children to deal with disability caused by medical condition (2005’s Letter Ruling 200521003)

Deduction for Medical Conferences and Seminars

Both transportation and conference fees deductible (under Revenue Ruling 2000-24)

Special Diet Foods

Generally, only the cost of special diet food over and above normal food (i.e., the premium; see Revenue Rulings 02-19 and 55-261)

Prescribed Vitamin Therapy; Hyperbaric Oxygen Therapy; Chelation Therapy; Equestrian Therapy; Individualized or Group Art, Dance, Music, and Play Therapies; Summer Camps, etc.

Medical Travel and Transportation

For 2020s tax returns: 17 cents per mile (20 cents per mile for 2019)

Lodging costs (but not meals) up to $50 per day are deductible for the taxpayer and one additional person if an overnight stay is necessary

Note: Un-reimbursed Medical Expenses are deductible only to the extent the taxpayer itemizes their deductions (Schedule A) and they exceed 7.5% of Adjusted Gross Income (AGI) thru 2020 (7.5% of AGI for 2019 was restored retroactively under the Taxpayer Certainty and Disaster Tax Relief Act of 2019)

Consider Flexible Saving Account (FSA) Health Care Plan if ineligible for medical expense deduction

However, the maximum pre-tax contribution is $2,750 for 2020 ($2,700 for 2019). After the Affordable Care Act, over-the-counter (OTC) medications required a prescription in order to be eligible for reimbursement from an Health Saving Account (HSA), FSA or Health Reimbursement Arrangement (HRA). The CARES Act now allows individuals enrolled in these pre-tax accounts to pay for OTC drugs and medicines without a prescription.

Impairment Related Work Expenses

• Business deduction in lieu of a medical deduction for attendant care services at place of employment (ordinary and necessary expense to help in performing job)
• Avoids AGI limitation imposed on un-reimbursed medical expenses NOT subject to prior law’s 2% AGI limitation imposed on un-reimbursed employee business expenses

Expanded definition of a “qualifying child”

• An individual with special needs can be older than 19 or 24 and qualify as a “dependent” for 2020 and 2019
• No gross income limitation for a “qualifying child” (The “gross income” limitation applies to a “qualifying relative” and is $4,300 for 2020 and $4,200 for 2019….review ALL requirements!)
• Prior to 2009, a taxpayer could claim a dependency exemption for an older sibling. This option is not available for tax years beginning in 2009 and later unless the older sibling is permanently and totally disabled (The Fostering Connections to Success and Increasing Adoptions Act of 2008).

NOTE: Personal and Dependency Exemption Deductions have been suspended (reducing the exemption amounts to ZERO) under 2017’s Tax Cuts and Jobs Act for 2018 through 2025. However, the definition of a dependent is still key for other deductions and credits such as the expanded child ($2,000) and dependent credits ($500). The Tax Cuts and Jobs Act increased the child tax credit from $1,000 to $2,000 per child and increased the refundable portion of the credit to $1,400. The Act provides a $500 nonrefundable credit for a qualifying dependent other than a qualifying child (i.e., a 17 year old child or a parent). 

 Credit for Special Needs Adoption Expenses

• $14,300 for a child with special needs in 2020 ($14,080 for 2019)…regardless of adoption expenses
• An eligible child is an individual who is under the age of 18, or is physically or mentally incapable of self-care.
• Must be a U.S. citizen or resident and requiring adoption assistance as determined by state authorities
• Qualifying expenses include: legal fees, court costs, and other related adoption costs
• The limit is per child, not per year (The credit is non-refundable with a c/o of 5 years)
• Credit is phased-out for taxpayers with adjusted gross income exceeding $214,520 ($211,160 in 2019)
• The credit is completely phased-out at $40,000 above the threshold
• For a “special needs” adoption, the credit is claimed in the year the adoption becomes finalized regardless of actual expenses paid or incurred in the year the adoption becomes final.

 10% Penalty Exception for Retirement Plan and IRA Distributions

• 10% penalty does not apply to a distribution that is less than or equal to the allowable medical expense deduction on Schedule A (regardless of whether the individual actually itemizes deductions) if the distributions are used to pay for the medical care during the year.
• Penalty waiver only applies to taxable amount of the distribution. The income tax still applies to the taxable component of the distribution.

For additional information concerning special needs trusts and disability planning, visit:

NJ Special Needs Trusts and Disability Planning