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Take advantage of all disability related tax breaks

Writer's picture: Alexandra Baig, CFP®Alexandra Baig, CFP®

Taxes are one of those certainties of life.  They may go up, they may go down, but they won’t go away.  The best that taxpayers, with help from their financial planners, can do is to minimize the impact of taxes.  That starts with making sure that the taxpayers are able to include in the calculations all of their dependents.  Generally speaking, taxpayers’ children “qualify” as dependents according to IRS regulations, but this qualification stops when the children reach age 24 (for full-time students) or age 19 (otherwise).  Parents of youth with disabilities will want to understand how that requirement is adapted for their children.  According to the IRS…

 

A son or daughter (biological, step-, foster, or adopted) or a sibling (whole, half- or step-), who is “permanently and totally disabled”, can be listed on one’s 1040 form as a tax dependent no matter what her/his age.  The IRS uses a definition of “permanently and totally disabled” that is virtually identical to that of the Social Security Administration.  The person “cannot engage in any substantial gainful activity due to a physical or mental condition.  A physician determines that the disability has lasted or can be expected to last more than a year or can lead to death.” for the full citation see here. (Income tax return by Nick Youngson CC BY-SA 3.0 Pix4free)


To be a dependent, the child or adult child with a disability must also live with the taxpayer for more than 6 months.  The adult child may not provide more than ½ (half) of her/his own support.  The claiming parent(s) must provide more than ½ (half) of the adult child’s support.

 

It is worth noting that Supplemental Security Income (SSI) as well as some other state- or county-level, means-tested benefits, received by the adult child and used for her/his own support, is considered support that is provided by a third party (neither the parent(s) nor the adult child).  It is also worth noting that the fact that an adult child pays rent or room and board to the parents with whom s/he lives in order to be eligible for the maximum SSI amount payable does not preclude that same adult child from being considered a dependent for IRS purposes.  For example, suppose an adult child is paying a flat-fee room and board to the parents of $500/month from their SSI benefit of $943/month.  Since the SSI that covers the room and board is support from a third party, the adult child is not providing more than ½ of their own support.  Assuming that the parents cover more than $11,316 ($943 x 12 months) of housing, food, education, medical, dental, and similar expenses for their adult child, the parents are paying more than ½ of the support; therefore, the adult child meets the IRS support test.  Now, suppose the adult child has monthly earned income of $285 and receives SSI of $843 and pays $500 in room and board?  Then, as long as the parent is contributing more than $13,536 ([$285 + $843] x 12 months), the adult child will meet the support test.

 

In most states, there are multiple categories through which a person with a disability may be eligible for Medicaid which, as we have noted, is required to access most adult-support services.  In most of the categories, adult eligibility is determined by a combination of disability diagnosis and income of the Medicaid beneficiary only.  However, for states that expanded Medicaid under the Affordable Care Act (ACA or Obamacare), there is a category of eligibility for low-income adults that does reference the Modified Adjusted Gross Income (MAGI) of the entire tax household, which includes all individuals listed on a single tax return.  If an adult child was determined eligible under the ACA category s/he may lose Medicaid if claimed on the tax return of the parent(s) who exceed the relevant ACA MAGI threshold.  The solution to this is to see if the adult child is also eligible under another Medicaid category, which is usually the case. 

 

While current-tax law has eliminated personal exemptions, they may return with future-tax law sunsets or updates.  In that case, filing parent(s) would be able to claim a personal exemption for their dependent adult child with a disability.  However, there are advantages even now to being able to claim your adult child with a disability.  If you are a single parent, claiming your adult child will permit you to file as “Head of Household”, which provides access to a much more generous standard deduction.  A taxpayer is also able to claim a dependent-care credit for an adult child with a disability even though this credit disappears the year a neurotypical child turns 13.  While a taxpayer cannot claim the Child Tax Credit for an adult child (anyone over the age of 17, whether or not they have a disability), the taxpayer generally is able to claim the Other Dependent Credit of $500 that exists under current law.  An adult child with a disability, who meets the dependence requirements, will also factor into the earned-income tax credit for eligible filers.

 

Taxpayers that itemize deductions may be able to include expenses attributable to the needs of the adult child with a disability.  It the parents are paying for medical insurance, appointments, therapies, and treatments for their adult child with a disability, those are deductible as medical expenses provided that the adult child is a dependent and the expenses are not covered by either an employer or insurance.  Over-the-counter medications, vitamins, and supplements may also be includable provided that they are prescribed by a licensed medical practitioner.  Taxpayers may also expense durable medical equipment for their adult child for which they pay out-of-pocket as well as any repairs for such equipment. 

 

If a taxpayer modifies her/his home at the recommendation of a medical practitioner, s/he may deduct the cost of such modifications, less any increase in the home’s value due to the modifications.  For example, suppose a taxpayer installs an in-ground swimming pool because a physician has recommended that her/his adult child with cerebral palsy swim in order to minimize muscle spasticity.  Let us further assume that the pool costs $50,000 to install and $4,000 per year to maintain and operate.  If the pool increases the value of the home by $25,000, the taxpayer could then include $29,000 of medical expenses in her/his year one itemized calculation.

 

Taxpayers may deduct the cost of attending conferences, designed to educate them about their child/adult child’s disability, although they cannot deduct the cost of food and lodging associated with the conference.  Parent taxpayers can also deduct any additional costs associated with their  child/youth with a disability attending school in a specialized setting provided that the primary reason for the specialized setting is to assist the child/youth child to, in the words of the IRS, “overcome” her/his learning disabilities. Such a deduction may apply to postsecondary programs designed specifically for students with intellectual and developmental disabilities.  Since all of these are considered “medical”, they are only deductible to the extent that they exceed 7.5% of the taxpayer’s modified adjusted gross income (MAGI).  While income taxes are certain, taxpayers can minimize the amount paid by applying all allowable deductions and credits.  Taxes are next due Tuesday, April 15, 2025.  There is plenty of time to prepare.

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Copyright Companions On Your Journey, LLC 2018

The information on this site is for educational purposes only and does not constitute investment or tax advice. 

Any third parties referenced on this site are not affiliated with Companions On Your Journey.  Images on this site are for fair and educational use.

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