Tax Breaks for Parents of Children With Functional Needs

The medical expense deduction, 529A accounts and the child and dependent care tax credit could lower your tax bill.
Tina Orem
Sabrina Parys
By Sabrina Parys and  Tina Orem 
Edited by Chris Hutchison

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Several tax breaks can help with the expense of raising children, but for parents of kids with functional needs, some of those breaks can be especially useful — if they know about those tax breaks in the first place. Here are three that can cut your tax bill, plus tips on how to get the most out of each.

1. Medical expense deduction

What it is: A way to deduct unreimbursed medical expenses — but only the amount that exceeds 7.5% of your adjusted gross income. For example, if your adjusted gross income is $40,000, the threshold is $3,000, meaning that if you have $10,000 in medical bills, you could deduct $7,000.

How to take advantage of it: Parents of kids with functional needs to keep track of all expenses they incur in seeking medical treatment for their children, including:

  • Mileage to and from doctor appointments and therapy.

  • Medically required foods.

  • Therapy supplies.

  • Travel and expenses (but not meals or lodging) to attend conferences about your child’s diagnosis.

  • Tutors.

  • Changes to the structure of your home.

  • In-home caregivers, if the doctor requires it for the child.

  • Tuition if the education is intended to overcome learning disabilities.

Keep in mind: Generally, deductible medical expenses must be required by a doctor in writing. You’ll also need to itemize on your tax return and have receipts, so allocate more time for tax prep if you go this route. And because how much you can deduct is linked to how much you make, try to do everything you can to lower your adjusted gross income, such as contributing to a 401(k) or individual retirement account.

2. A 529A account (ABLE accounts)

What it is: An ABLE account is a cross between a functional needs trust and a 529 college savings plan. The accounts are administered by the state, and they are only for people with a disability that began before age 26, though you can open one after your child turns 26. The distributions are tax-free if used for qualified disability expenses (learn what counts in IRS Publication 907).

How to take advantage of it:

  • The contribution limit is $15,000 a year per account (from anyone). In some cases, employed ABLE beneficiaries can make additional contributions. The beneficiary can’t contribute job earnings if the employer is contributing to a 401(a), 403(a), 403(b) or 457(b) plan for the beneficiary at work.

  • Contributions to a 529A account aren’t deductible at the federal level but you may get a tax break on your state tax return, depending on the state. The money can be used for a wide variety of living expenses.

  • You can roll over money from one family member’s regular 529 plan into another family member’s ABLE account.

  • Money in an 529A/ABLE account usually doesn’t count as an asset in tests of eligibility for certain public benefits programs.

  • The account’s designated beneficiary might be able to claim the saver’s credit for contributions to the account.

Keep in mind: States have different limits on how big the account can get before suspending certain benefits, so be sure to do your homework. Also, Medicaid can recoup its expenses from the child’s 529A account if the child dies.

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3. Child and dependent care credit

What it is: A tax break for paying someone to care for your child or other dependent while you work or look for work. Payments to your spouse or another one of your minor children don’t count.

Generally, it’s up to 35% of up to $3,000 of child care and similar costs (up to $6,000 of expenses for two or more dependents). Usually the age limit is 13, but there’s no age requirement if your child has a disability. Because it’s a credit, not a tax deduction, it cuts your tax bill on a dollar-for-dollar basis instead of simply reducing your taxable income.

For 2021, the American Rescue Plan Act makes this tax credit refundable, meaning that even if your tax bill is already zero, you might get extra money back in a tax refund. In addition, the credit is up to 50% of up to $8,000 of day care and similar costs ($16,000 of expenses for two or more dependents).

How to take advantage of it:

  • If you’re married, be sure to file jointly.

  • Keep your job, too; you (and your spouse if filing jointly) have to have earned income to get this credit. Pensions, child support, unemployment compensation and interest or dividend income are examples of things that don’t count as earned income.

  • The credit decreases for higher earners.

Keep in mind: To take full advantage of these tax breaks, parents of kids with functional needs should make plans and keep good records throughout the year, not just at tax time. “The biggest thing that I see is people starting to think about this each year in March,” says Robert Fleming, an attorney at Fleming & Curti in Tucson, Arizona. “If they’ve planned it out a little bit and thought about the expenditures as they go, then they’re obviously going to have a much better experience, and they’re probably going to save money on their taxes.”

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