Unique tax benefits are available to families who have children with special needs. And thanks to recent changes in the tax code, there are opportunities to save substantial amounts of money at tax time. Thomas M. Brinker, Jr., a professor of accounting at Arcadia University in Pennsylvania, has put together a handy checklist of some potential tax benefits that could be available to families who care for a special needs child.

This list includes the tax benefits that have been available for a while and incorporates updated information from the Tax Cut and Jobs Act of 2017, the CARES Act (passed in March 2020 for COVID relief), and the American Rescue Plan of 2021 that have a direct impact on families with special needs dependents. Following are some highlights. 

Special education

If the special needs child attends a special school (or is in an institution) for the main purpose of alleviating his disability by using the facility's resources, the cost of the child's tuition, lodging, meals, and transportation is deductible, as are the costs of supervision and care. Regular independent schools can be classified as “special schools” if the school has a special curriculum for neurologically disabled individuals, and according to IRS regulations, their tuition costs would be deductible.

If the child is receiving private tutoring by a specialized teacher, the IRS has ruled that those fees are deductible, as are tuition fees for special education provided to dyslexic children.

Services and therapies

Prof. Brinker notes that prescribed vitamin and equestrian therapies are deductible, in addition to other group or individual programs such as art, music, dance, and play, and summer camp. It is crucial to get a doctor's recommendation as part of the necessary paperwork.

Medical expenses

As Prof. Brinker explains, “Unreimbursed medical expenses are deductible only to the extent that the Tax Payer itemizes their deductions (Schedule A) and these exceed 7.5 percent of their Adjusted Gross Income (AGI).” Note that as part of the Tax Cuts and Jobs Act of 2017, the standard deduction was significantly increased, and is $12,550 for individuals and $25,100 for couples in 2021. So only families who expect to spend substantially more than these amounts on medical care for their special needs dependent would benefit from this provision.

For families who plan on itemizing their special needs medical expenses, note that travel costs for medical treatment are deductible as follows: $50 per day of food and lodging for the taxpayer and one other person (if an overnight stay is required), and driving expenses at $.16 per mile.

Also, registration and attendance fees for medical conferences (though not food and lodging) qualify, as long as the conference topic relates to the condition of the dependent with special needs.

Tax-deferred and tax-advantaged accounts

Parents of children with special needs might consider enrolling in a flexible spending account (FSA) through their employer to pay for qualifying medical expenses that are not reimbursed. For 2021, the maximum annual contribution to an FSA is $2,750, and as a provision of the CARES Act, over-the-counter medications are now eligible expenses for FSAs.

Regarding early withdrawals from qualified retirement accounts such as IRAs and 401(k)s, any distributions spent on deductible medical care (i.e., amounts in excess of the 7.5 percent of AGI threshold) for dependents with special needs are not subject to the 10 percent penalty (though they are still subject to income tax).

Other benefits in Prof. Brinker's checklist include an expanded definition of a qualifying child, who can be older than 19 if shown to have special needs and lives at home. And revised provisions mean changes to the personal and dependency exemption rates and phase-outs, as specified in the Tax Cuts Act of 2017 and the American Rescue Plan of 2021.

To ensure you are taking advantage of all the tax benefits and credits available to you, consult with an attorney whose practice focuses on working with families of special needs children.

If you have any questions about your special needs planning, feel free to give us a call at (714) 374-2244 or fill out this contact form.