Year 2005 Tax Benefits for Parents of Children with Learning Disabilities

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Will Hawke wrote: Year 2005 Tax Benefits for Parents of Children with Learning> Disabilities>>>> It's that time of year again! Thank you to Elly for passing this> along...>>> Year 2005 Tax Benefits for Parents of Children with Learning> Disabilities>> If you have a child with a severe learning disability (LD), 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 federal> income 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. You should also explore potential state income tax> benefits, which are too numerous for review in this guide.>> 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 LD 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.>> 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, for example, 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 2002 tax year (and also> for the 2003 and 2004 tax years) and claim a refund if the return is> filed not later than April 15, 2006. (See IRS Publication 17, Your> Federal Income Tax, 2005, at pp. 18-19.)>> 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 LD, 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 2005 is fifteen 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> $5,250 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 the 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:> The parent attends the conference upon the recommendation of a medical> provider treating the child;> 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;> 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;> The conference deals with specific issues related to a medical condition> and does not just relate to general health and well-being.> 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 without adult> supervision would be a qualifying child for this credit.>> 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 following a divorce, a non-custodial> parent who provides the majority of support for a child with a severe> LD, and also pays for

medical/educational expenses related to the> child's LD, may likewise qualify for both the exemption and medical> expense deductions. A new definition of "qualifying child" took effect> in the 2005 tax year; the most significant change is that the taxpayer> need not show support for a "qualifying child" but the child must have> lived with the taxpayer for more than six months during the tax year.> For each dependent, there is an exemption from taxable income, worth> $3,200 for the 2005 tax year. For a taxpayer with a marginal tax rate of> 25 percent, each exemption will reduce the tax liability by $800.> 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> $37,263 ($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> $4,400 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: . Low Income Taxpayer Clinics are another> source of help. The IRS funds more than 100 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 $49,000 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: . 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.>>> C 2006 and Helen Schwab Foundation Created: 01/12/2006>>>> About the Contributors>> 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).>>>>>>>>