When preparing their annual federal income tax return, taxpayers may reduce their tax liability by claiming certain deductions. Taxpayers must choose between taking the standard deduction, which the IRS offers to all taxpayers at a flat amount of money, or itemizing their deductions. Choosing the standard deduction is easy and results in zero effort by the taxpayer. Itemizing deductions, however, requires some accounting by the taxpayer along with maintaining adequate supporting documentation. It is impossible to say whether the standard deduction or itemized deduction is in the best of an individual taxpayer without analyzing their entire tax situation. However, opting to itemize allows taxpayers to claim a deduction for qualified, unreimbursed medical expenses paid for the taxpayer, the taxpayer’s spouse, or their dependent. This blog focuses on medical expenses incurred on behalf of the taxpayer’s dependent who happens to be a special needs child.
Generally, unreimbursed medical expenses may be deducted on Schedule A, which is attached to the IRS Form 1040, if the taxpayer chooses to itemize. The actual itemized deduction for qualified unreimbursed medical expenses remains limited to certain adjusted gross income (“AGI”) thresholds. Taxpayers may only deduct the amount of total medical expenses incurred that exceed 10% of their AGI or 7.5% of AGI if the taxpayer or their spouse is over age 65. IRS guidance indicates that deductible medical expenses include payments for the diagnosis, cure, mitigation, treatment or prevention of a disease. This concept translates into potential tax savings for parents of children with special needs.
As such, parents of special needs children may be able to deduct qualified tuition payments to schools providing care to students diagnosed with learning difficulties such as dyslexia or attention deficit hyper-activity disorder. The IRS has published guidance indicating that tuition for a taxpayer’s dependent who has been diagnosed with these types of learning challenges constitutes a qualified medical expense. However, there are some caveats. In order for the deduction claimed to be valid, it is critical that the child have been diagnosed with a learning disability by a physician and that the child is enrolled in a specialized school for the related disability. Meeting these requirements enables the tuition for the specialized school to be claimed as a medical expense on Schedule A for as long as the child maintains enrollment and continues to be diagnosed with the disability. Of course, the potential deduction is still subject to the AGI thresholds discussed above.
Other potentially deductible amounts include costs related to the diagnosis, cure, mitigation, treatment, and prevention of the child’s affliction. Specialized education for children with dyslexia or attention deficit disorders fall under this definition and therefore costs associated with their education may constitute a potential itemized deduction as well. Again, the child must be properly diagnosed by a doctor and enrolled in a school specifically situated to attend to that child’s needs.
Beyond the AGI limits and the diagnosis requirements, the educational program must also meet specific criteria in order for the tuition to be deductible. The school must be specifically geared toward helping the student overcome or live with their disability. Therefore, taxpayers should be warned that general or routine educational programs will not qualify for this contemplated tax treatment. The specialized school need not employ physicians, but must have professional staff competent to design and supervise a curriculum while also providing medical care to the child. Further, the child must be enrolled in the school for the principal reason of managing or overcoming their disability. Ordinary education received by the child while in the specialized school’s care must be incidental to the specialized programs offered to the disabled child. Missing any of these qualifications in the child’s educational program may jeopardize the deduction. Taxpayers should review the schooling arrangement and diagnosis of their child with a qualified attorney prior to claiming the deduction, to ensure all applicable requirements have been met.
It is important to reiterate that “special classes” offered to challenged-students in a standard public or private school will not qualify as deductible medical expenses. It is also important to distinguish specialized schools from reform or behavioral correction facilities as the latter, likewise, do not qualify for tax benefits.
Unfortunately, because of the math behind the AGI thresholds, taxpayers may be required to incur a significant amount of medical expenses before obtaining any tax benefits associated with the itemized deduction. It all depends on the AGI amount reported on the first page of their 1040. Regardless, the right team of lawyers with an understanding of both special education programs and tax law can help guide you to make the best decision for your child while capturing any related tax benefits.