Several tax breaks can help with the expense of raising children, but for parents of kids with special needs, some of those breaks can be especially useful — if they know about those tax breaks in the first place. Here are four that can cut your tax bill, plus tips on how to get the most out of each.
1. Dependency exemption
What it is: A fixed deduction allowed to every taxpayer. Generally, you can claim a $4,050 exemption for yourself, plus one for your spouse and one for each dependent. The exemption starts phasing out at $313,800 of adjusted gross income for joint filers. To count as a dependent, a child typically has to live with you for at least half the year, provide less than half of his or her own support and be under a certain age. There’s no age limit if the child is disabled, however.
How to take advantage of it: This exemption is straightforward for most — you list your dependents on the first page of your tax return — but it still can be tricky to navigate. If you’re a divorced parent and you’re paying the expenses for a child with special needs, for example, be sure the child counts as your dependent so you can claim the exemption, says Robert Fleming, an attorney at Fleming & Curti in Tucson, Arizona. Grandparents might also qualify if they support special needs grandchildren, he notes.
2. 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: Gina Levy, a certified public accountant in Los Angeles, advises parents of kids with special 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
- Special tutors
- Changes to the structure of your home
- In-home caregivers, if the doctor requires it for the child
- Special education tuition if the education is intended to overcome learning disabilities
Generally, deductible medical expenses must be required by a doctor in writing, Levy cautions. 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, she says.
3. A 529A account
What it is: A cross between a special needs trust and a 529 college savings plan. The accounts are administered by the state, and they are only for people who became disabled before age 26, though you can open one after your child turns 26. The contribution limit is $14,000 a year per account. Contributions to a 529A account aren’t deductible at the federal level but may be deductible on a state tax return, depending on the state. The money can be used for a wide variety of living expenses.
How to take advantage of it: The low contribution limit makes it hard to accumulate a lot of money in these accounts, Fleming says, but money in a 529A doesn’t count as an asset in tests of eligibility for certain public benefits programs. States have different limits on how big the account can get before suspending certain benefits, however, so be sure to do your homework. Also, Medicaid can recoup its expenses from a 529A account if the child dies.
4. 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, the credit is 20% to 35% of up to $3,000 of day care and similar costs (up to $6,000 of expenses for two or more dependents). There’s no age requirement if your child is disabled. 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.
How to take advantage of it: If you’re married, be sure to file jointly and don’t use Form 1040EZ. Keep your job, too; you 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. The credit decreases for higher earners, but it never disappears.
To take full advantage of these tax breaks, parents of kids with special 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,” Fleming says. “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.”