Raising children with disabilities can be expensive. For example, according to Autism Speaks, lifetime costs for people with Autism can run as high as $2.4 million, and raising dependents with other disabilities may cost even more. Adding a high tax bill to this already expensive cost can be a burden for families. And while the IRS doesn’t offer a special tax credit for children with special needs, some caregivers might be able to lower their tax bills by taking advantage of some of these tax breaks.
IRS rules for claiming children with disabilities
Having a child with a disability can affect your taxes. For example, the Earned Income Tax Credit (EITC) is a refundable tax credit, meaning you could receive all or part of the credit as a refund. The credit is calculated, in part, based on the number of qualifying children you have. The IRS considers children with total or permanent disabilities qualifying children for this credit, regardless of their age.
(Note: Generally, "qualifying children" must be under 19 or 24 if a full-time student).
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Childcare for children with special needs
If you pay for childcare for your special needs child, you may be able to claim the child and dependent care credit, even if your child is 13 or older. The credit is typically only available for children under 13. But if the IRS considers your dependent to be “disabled” (more on that below), they may qualify.
- The credit is non-refundable, meaning it can lower your tax bill to zero, but you will not receive any part of it back as a tax refund.
- The child and dependent care credit is worth up to $1,050 for one qualifying dependent.
- The maximum credit is $2,100 for two or more qualifying dependents.
Benefits of an ABLE account
ABLE (Achieving Better Life Experiences) accounts are state savings programs that help parents and guardians pay for qualified disability expenses. While investment income is typically taxable, investment earnings from an ABLE are not, if distributions are used to pay for qualified expenses.
Additionally, some states offer tax deductions for contributions that you make to qualified ABLE accounts. However, there are some important things to know before opening an ABLE account for your child.
- Your child may still be able to receive Social Security disability benefits, even if savings in an ABLE account exceed $2,000.
- The beneficiary must have received a diagnosis for the disability before age 26.
- The annual contribution limit is typically equal to the gift tax exclusion ($18,000 for 2024).
- Rules and potential benefits vary by state.
Tax deductions for children with special needs
To deduct medical expenses on your tax return, you’ll need to itemize deductions (rather than take the standard deduction). However, you may be able to deduct more than the costs for doctor visits and testing. Modifications made to your home to accommodate a dependent with a disability may qualify as a medical expense.
Additionally, you may be able to claim dependent care expenses as a medical deduction as long as you don’t use the same expenses to claim the child and dependent care credit. If your child has a service animal, you may even be able to deduct the costs of maintaining the animal (veterinary visits, food, etc.). Several other expenses may qualify for medical deductions.
Even if you don't itemize deductions, you might be able to use health savings account (HSA) funds to pay for home modifications and service animals, if they are due to a medical necessity (more on this below).
Just make sure you go through the proper steps and keep good records if you choose to go this route.
A CPA or other qualified tax professional can help you determine which costs qualify as HSA-eligible expenses and which medical costs you can deduct.
Special education tax deductions
Some tax advantage savings accounts allow exclusions to the rules for beneficiaries with disabilities. For example, education tuition is not typically considered a qualified expense under an FSA (flexible spending account) or HSA.
These types of accounts allow you to pay for qualified medical expenses with tax-free dollars. However, if you have a letter of medical necessity (LMN), special needs education tuition may qualify for reimbursement.
(Note: A letter of medical necessity is a statement made by a health care professional that deems the service necessary to treat an illness or condition).
Who is considered 'disabled' by the IRS?
For the IRS to consider your dependent to be "disabled," your child must have a disability that meets one of the following criteria.
- The disability must have lasted continuously for at least one year.
- It will last continuously for at least one year.
- The disability can lead to death.
You may need to provide proof of your child’s disability to the IRS. Acceptable proof includes a letter from the doctor or a social services agency defining the disability.
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