Year 2004 Tax Benefits for Parents of Children with Learning Disabilities

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Year 2004 Tax Benefits for Parents of Children with Learning Disabilities

If you have a child with a severe learning disability, you may qualify for

valuable tax benefits. If your child has AD/HD, or other physical, mental or

emotional impairment, you may also qualify for tax benefits. Because tax

laws are complex, and many tax preparers often do not have occasion to use

these unique tax benefits, families are at risk of losing refunds worth many

thousands of dollars. It’s likely that 15-30 percent of families with a

disabled child have one or more unclaimed tax benefits.

This guide provides a brief summary of the most significant tax benefits and

should not be considered legal advice. Tax decisions should not be made

simply on the basis of the information provided here. You are advised to

print out this guide and give a copy to your tax advisor.

Internal Revenue Service (IRS) “Publications” represent the most accessible

form of guidance to the tax rules for the general public, and relevant IRS

publications are cited for each of the tax benefits listed below. The IRS

also issues interpretations of the code and regulations called “Revenue

Rulings.” These interpretations are formal, binding policy statements. Tax

professionals rely on revenue rulings in advising clients about tax

liabilities and tax benefits. For example, Revenue Ruling 78-340, discussed

later, authorizes a medical expense deduction for tuition or tutoring fees

paid for a child with a severe learning disability who is attending a

special school at the recommendation of the child’s doctor.

Tip: Relative caretakers, such as grandparents or aunts, and non-relative

caretakers, such as foster parents, also may qualify for tax benefits. See a

related tax guide of the Casey National Center for Resource Family Support.

Tax Benefits: Deductions vs. Credits

It’s important to distinguish between two different categories of tax

benefits. One category is a “deduction from taxable income” or simply “a

deduction.” The value of a deduction is based on the marginal tax rate of

the taxpayer. If a person has a tax deduction “worth $1,000,” the actual

value of the deduction will be determined by the taxpayer’s tax rate. So a

taxpayer in the lowest tax rate bracket, 10 percent, will have taxable

income reduced by $1,000, and save $100 (10 percent of $1,000). However, a

taxpayer in a higher bracket, say the 28 percent, will have taxable income

reduced by $1,000, and save $280 (28 percent of 1,000).

The second tax benefit is a tax credit, which is a dollar for dollar

reduction in tax liability. An individual with a tax credit worth $1,000

will have his tax bill reduced by $1,000. This means that the actual amount

of taxes is reduced by the amount of the tax credit. However, because tax

laws and procedures are very complicated, other factors can influence the

ultimate value to the taxpayer.

The following summarizes the principal tax benefits that may be available to

families caring for children with severe learning disabilities.

Retroactive Claims for Refunds

The IRS allows taxpayers to file amended returns, and collect refunds for

unclaimed tax benefits, retroactively up to three years. This means a

taxpayer can file an amended return for the 2001 tax year and claim a refund

if the return is filed not later than April 15, 2005. (See IRS Publication

17, Tax Guide 2004, at pp. 20-21.)

Medical Expense Deductions

The IRS has ruled that tuition costs for a special school that has a program

designed to educate children with learning disabilities and amounts paid for

a child’s tutoring by a teacher specially trained and qualified to deal with

severe learning disabilities may also be deducted. (Revenue Ruling 78-340,

1978-2 C.B. 124.) Special instruction or training or therapy, such as sign

language instruction, speech therapy, and remedial reading instruction also

would be deductible. Related books and materials can qualify for the medical

expense deduction.

Generally, to qualify for the deduction, the child’s doctor must recommend

the special school, therapy, or tutoring, and there must be a medical

diagnosis of a neurological disorder, such as severe learning disability,

made by a medical professional. Transportation expenses to the special

school or to the tutor also qualify for a medical expense deduction. If

transportation is by car, the allowable expense in 2004 is fourteen cents

per mile plus parking and tolls, or the actual cost of operating the

vehicle.

Diagnostic evaluations also qualify for a medical expense deduction. This

can include testing by a speech-language pathologist, psychologist,

neurologist, or other person with professional qualifications.

Note: Expenses claimed as a medical expense deduction and later reimbursed

by a school district or insurance company must be reported as taxable income

for the year in which the reimbursements are received.

Not everyone who has medical expenses can use them on their tax return.

Medical expenses must be claimed on Schedule A, Itemized Deductions, and are

subject to certain limitations. First, the family must have itemized

deductions that exceed their standard deduction in order to use Schedule A

(about 65 percent of taxpayers do not itemize for this reason). Second,

medical expenses are allowed as a deduction only to the extent that they

exceed 7.5 percent of adjusted gross income, a significant threshold for

many families. (See IRS Publication 502, Medical and Dental Expenses.)

Health Saving Accounts & Flexible Savings Arrangements

Alternative approaches to obtaining tax benefits in connection with medical

expenses may involve use of a Health Saving Account (HSA) or a Flexible

Savings Arrangement (FSA). An HSA allows a worker to use up to $5,150 in

pretax income for medical expenses. An HSA may only be opened where the

employee has a “high deductible” health insurance plan. Amounts placed in an

HSA may be carried over to following years if not used.

A Flexible Savings Arrangement (FSA) can be part of a “cafeteria plan” of

alternative fringe benefits offered by an employer. An employee can allocate

pre-tax income to the account, and then withdraw it during the year to pay

for medical expenses. Employers may also make contributions to the FSA, and

the maximum amount is set by the terms of the employer plan. Two important

conditions are that amount to be placed in the account must be determined by

the employee at the beginning of the year, and funds not used by the end of

the year are lost. The employer’s human resource office can provide more

information. Also, see IRS Publication 969, Health Savings Accounts and

Other Tax-Favored Health Plans.

Deduction for Disability Related Conferences

In May 2000 the IRS issued Revenue Ruling 2000-24, which offers guidance —

and good news — for parents of children with disabilities. Parents who

attend conferences to obtain medical information concerning treatment for

and care of their child may deduct some of the costs of attending a medical

conference relating to a dependent’s chronic health condition. The important

points to remember are:

• Medical expenses are deductible only to the extent that they exceed 7.5

percent of an individual’s adjusted gross income, and that limitation

applies to this deduction as well;

• Costs for admission and transportation to a medical conference relating to

your dependent’s chronic health condition are now deductible, if the costs

are primarily for and essential to the care of the dependent.

• Costs of meals and lodging related to a conference, however, are not

deductible. (Note, however, lodging, up to $50 per night, is deductible if

you must travel and stay at a hotel while your dependent is receiving

medical treatment from a licensed physician in a hospital or a related or

equivalent setting.)

• Costs are “primarily for and essential to the care of the dependent” (and

therefore deductible) if:

o The parent attends the conference upon the recommendation of a medical

provider treating the child;

o The conference disseminates medical information concerning the child’s

condition that may be useful in making decisions about the treatment of or

caring for the child;

o The primary purpose of the visit is to attend the conference. While at the

conference, the parent’s social and recreational activities in the city he

or she is visiting are secondary to attendance at the conference;

o The conference deals with specific issues related to a medical condition

and does not just relate to general health and well-being.

The full text of IRS Revenue Ruling 2000-24 is available at Amicus for

Children, Inc.

Child and Dependent Care Credit

The Child and Dependent Care Credit is allowed for work related expenses

incurred for dependents of the taxpayer. Generally the dependent must be

under the age of 13. However, if the child has a disability and requires

supervision, the age limit is waived. For example, a 16-year-old with severe

AD/HD and a behavior disorder who cannot be left alone would be a qualifying

child for this credit.

Because tax laws are complex, and many tax preparers often do not have

occasion to use these unique tax benefits, families are at risk of losing

refunds worth many thousands of dollars.

Expenses up to $3,000 per year for one qualifying dependent and up to $6,000

for two or more qualifying dependents are allowed. Expenses for regular

childcare services, after-school programs, and summer camp qualify although

overnight summer camp expenses do not. Payments to a relative to care for a

child also qualify, as long as the relative is not a dependent of the

taxpayer. The credit is calculated at 20-35 percent of allowable expenses,

based on the family’s adjusted gross income. The average credit is about

$600 but can be as high as $2,100. (See IRS Publication 503, Child and

Dependent Care Expenses.)

Exemption for Dependents

A taxpayer is entitled to claim an exemption for each qualified dependent.

This may appear relatively straightforward, but caretakers, such as

grandparents, aunts, or even foster parents, may overlook exemptions. Also,

in some cases a non-custodial parent who provides the majority of support

for a child with a severe learning disability, and also pays for

medical/educational expenses related to the child’s learning disability, may

likewise qualify for both the exemption and medical expense deductions.

There is a five-part test, with the most significant test involving support.

That is, the taxpayer must be the primary source of support — more than 50

percent — for the person claimed as a dependent. For each dependent, there

is an exemption from taxable income, worth $3,1000 for the 2004 tax year.

For a taxpayer with a marginal tax rate of 25 percent, each exemption will

reduce the tax liability by $775. Equally important, the dependency status

is required for some tax benefits such as the child and dependent care

credit listed above. Also dependents under age 17 qualify for the Child Tax

Credit, worth up to $1,000 per child. (See IRS Publication 501, Exemptions,

Standard Deduction and Filing Information , and Instructions to Form 1040.)

Earned Income Tax Credit

Families filing a married joint return with adjusted gross income under

$35,458 ($1,000 less for taxpayers filing as single or head of household)

may qualify for the Earned Income Tax Credit (EITC) based on the presence of

one or two “qualifying children” in the taxpayer’s home. For EITC purposes,

a “qualifying child” is a biological child, adopted child, step child, or

foster child who resided with the taxpayer for more than six months during

the calendar year, and is under age 19 at the end of the year. A “qualifying

child” is also a child age 19-23 who is a full-time student for at least one

semester. Finally, a severely disabled child is a “qualifying child” without

regard to age, even into adulthood, as long as the child continues to live

with his parent(s). Note that a “qualifying child” for EITC does not have to

meet the requirements for a dependency exemption. EITC benefits are as high

as $4,300 for families with two or more qualifying children, although the

average EITC nationally is about $1,800. (See IRS Publication 596 for more

information.)

Where to Get More Information

The IRS provides free booklets that cover each of the topics listed above.

The titles listed below may be ordered by calling the IRS toll-free number:

. Generally, taxpayers may order up to three copies of any

publication or form. The following booklets may be helpful:

• IRS Publication 17: Your Federal Income Tax (a comprehensive 300+ page

guide)

• IRS Publication 502: Medical and Dental Expenses

• IRS Publication 503: Child and Dependent Care Expenses

• IRS Publication 501: Exemptions, Standard Deduction and Filing Information

• IRS Publication 596: Earned Income Tax Credit

• IRS Publication 969: Health Savings Accounts and Other Tax-Favored Health

Plans

Extensive information can also be obtained from the IRS. The American Bar

Association Section on Taxation contains links to scores of tax related

sites.

Tax Counseling and Tax Preparation Assistance

Certified Public Accountants (CPAs) represent one source of tax advisors,

although not all CPAs have expertise in this area. Enrolled Agents are

individuals licensed by the IRS to represent taxpayers, and this group

generally has a high degree of expertise.

Typically, charges for a tax return with multiple deductions and credits

will cost $150-300. Several national companies provide tax preparation and

tax counseling services. Many operate only during the tax filing season but

a small number in larger urban areas are open year round. Fees charged by

these companies are slightly lower than the fees typically charged by CPAs

and Enrolled Agents.

Some parents may not be able to afford fees charged by professional tax

preparers, who generally seek payment in advance. An option for lower income

clients is the Volunteer Income Tax Assistance (VITA) program. However,

because of broad range in skills and expertise of volunteers, caution is

recommended. Some large cities have one or more VITA programs that offer

professional level services. A university accounting department or the local

legal services program may be able to help you identify a high quality VITA

program.

Disputes with the IRS

Disputes with the IRS are relatively rare; less than 1.5 percent of all

individual income tax returns are subject to an IRS audit. However, if the

IRS questions your return, and you feel an IRS agent is not responding

properly, contact the Taxpayer Advocate for assistance toll-free at (877)

777-4778. Low Income Taxpayer Clinics are another source of help. The IRS

funds more than 100 such clinics to represent lower income taxpayers in

disputes with the IRS or state revenue departments. Clinics assist taxpayers

with income under 250 percent of the poverty level — about $48,000 for a

family of four. Some clinics, especially those attached to law schools, will

represent higher income families. Information on the nearest clinic can be

obtained from the general IRS toll-free inquiry number at .

Families above this income level should call their county or state bar

association.

Final Thoughts

This guide offers a brief summary of some, but not all, of the potential tax

benefits that may be available to you. You should obtain copies of the IRS

publications cited above and discuss with your tax advisor whether these

benefits apply to you. Again, you should not rely on this guide alone to

determine whether you should claim any of the tax benefits reviewed here.

About the Contributor(s)

A. O'Connor is an attorney who promotes awareness of tax policies

that benefit families. In addition, he represents parents in disputes with

local school districts concerning special education services for learning

disabled children. He is a Board Member of the Council of Parent Attorneys &

Advocates (COPAA).

© 2005 and Helen Schwab Foundation   Created: 01/14/2005