As the number of children diagnosed with autism, asperger’s syndrome, and other neurological disorders continues to skyrocket, the disruption it causes in the lives of all those concerned is unmistakable—as are the costs of providing care for the special needs child. As reported by the Autism and Developmental Disabilities Monitoring (ADDM) Network in March 2012, as many as 1 out of 88 children born today has an autism spectrum disorder or ASD. A report by the Centers for Disease Control and Prevention (CDC) has estimated that rate is as high as 1 in 50. Other disabilities are also becoming more prevalent, according to the CDC. Between 1997–1999 and 2006–2008, there was an 18.2% increase in blindness/sight impairment among children age 3 to 17, a 9.1% increase in seizures, and a 24.7% increase in “other developmental delay” (which excludes autism, attention deficit hyperactivity disorder, and learning disabilities). Further complicating the situation, parents with special needs children are often of unaware of possible tax benefits that are available and forgo hundreds, if not thousands, of dollars in potential tax deductions and credits. Michael A. O’Connor, an attorney who has written extensively on this topic, believes that 15% to 30% of families with a disabled child have one or more unclaimed tax benefits. Among these potential tax benefits are deductions or credits for the dependency exemption, medical expenses, special instruction, capital expenditures for medically required home improvements, impairment-related work expenditures, and the earned income tax credit.

INCOME TAX PROVISIONS RELATED TO DISABILITIES

Dependency Exemption:

A taxpayer may claim a dependency exemption ($3,900 for 2013), for a “qualifying child” or a “qualifying relative.” With passage of the Working Families Tax Relief Act of 2004, P.L. 108-311 (effective 2005), the definition of a “qualifying child” and “qualifying relative” in Sec. 152(a) was amended to provide a uniform definition for purposes of the dependency exemption and for the child tax, dependent care, and earned income tax credits.

Under the definition, to be a qualifying child, in addition to meeting the relationship test (taxpayer’s child, stepchild, eligible foster child, adopted child, or descendant (e.g., grandchild), or taxpayer’s brother, sister, stepbrother, stepsister, or their descendant (e.g., niece, nephew)), an individual (Sec. 152(c)) must meet any one of these requirements:

1.  the individual must be under the age of 19 or a  student under the age of 24 at the end of the year (to be a student the individual must be enrolled as a full-time student during some part of five calendar months during the year)
 
2.  the individual must be or the individual must be totally and permanently disabled at any time during the year (Sec. 152(c)(3)(B)). Furthermore, while Sec. 152(c)(3) was amended for tax years beginning in 2009 to require that the qualifying child be younger than the individual claiming the dependency exemption, this rule does not apply to a child who is permanently and totally disabled. Age is not relevant in determining the dependency exemption of an individual who is permanently and totally disabled. An individual is permanently and totally disabled if he or she is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months (Sec. 22(e)(3)). A physician must certify in writing that the individual is permanently and totally disabled.

Qualifying child

•  Special needs individual can be any age and claimed as a dependent.
•  No gross income limitation for a “qualifying child.”
•  Prior to 2009, a taxpayer could claim a dependency exemption for an older sibling. This option is not available for tax years beginning in 2009 and later unless the older sibling is permanently and totally disabled (Fostering Connections to Success and Increasing Adoptions Act of 2008, P.L. 110-351).

When considering whether an individual is a taxpayer’s qualifying child, it is important to remember that grandparents, uncles, aunts, brothers, and sisters can satisfy the relationship test and, therefore, may be allowed to claim the dependency exemption for an individual who is permanently and totally disabled, regardless of the child’s age.

Medical expenses for special school instruction

In general, to the extent they exceed the 10% of adjusted-gross-income (AGI) floor in 2013 (7.5% of AGI for 2012), a taxpayer can deduct qualifying medical expenses, including those of his or her spouse and dependent children. In most cases, costs related to providing a child’s education are not considered medical care and, therefore, are not deductible as a medical expense. However, according to Regs. Sec. 1.213-1(e)(1)(v), the unreimbursed cost of attending a “special school” for a neurologically or physically handicapped individual is deductible as a medical expense if the principal reason for sending the individual to the school is to alleviate the handicap through the school’s resources.

The expenses of a special school that are deductible as medical expenses include amounts paid for lodging, meals, transportation, and the cost of ordinary education that is incidental to the special services the school provides. Also, any costs incurred for the supervision, care, treatment, and training of a physically and/or neurologically handicapped individual are deductible if the institution provides the services A special school is distinguishable from a regular school by the substantive content of its curriculum, and its status is not determined by the institution as a whole but by the nature of the services received by the individual for whom a medical care deduction is sought. The IRS considers the medical facilities and therapeutic orientation of a school as critical factors in determining whether a school qualifies for a medical care deduction.

Through case law, regulations, and rulings (see, e.g., Regs. Sec. 1.213-1(e)(1)(v)(a); Letter Ruling 200729019; Sims, T.C. Memo. 1979-499; and Rev. Rul. 70-285), the IRS has recognized several types of schools that qualify as “special schools” for purposes of the medical expense deduction. These include schools that:

•  Teach braille to the blind and lip reading to the deaf;
•  Train the intellectually disabled;
•  Give personal daily attention to the student to improve the student’s low attention span;
•  Provide an environment in which intellectually or physically handicapped students can adjust to a normal competitive classroom situation; or
•  Design a special curriculum to accommodate the needs of handicapped children with IQ scores ranging from 50 to 75.

A regular school with special curricula can also be classified as a special school for those individuals benefiting from a special curriculum. For example, in Rev. Rul. 70-285, a child attended a regular school that had a special curriculum for intellectually disabled children. Since the school’s special education curriculum was a severable aspect of the school’s activities, the IRS ruled that the special curriculum qualified the school as a special school with respect to the child.

In Rev. Rul. 78-340, the IRS concluded that a taxpayer whose child had severe learning disabilities caused by a neurological disorder (e.g., an ASD) could deduct as a medical expense amounts paid for tuition and related fees for the child’s education at a special school that has a program designed to “mainstream” these children so they can ultimately return to a regular school. The ruling further held that amounts paid for private tutoring by a specially trained teacher are also deductible. However, the ruling stated that for the costs to be deductible, a physician must recommend both the special school and the tutoring.

In Letter Ruling 200521003, the IRS expanded the definition of special schooling to include tuition for programs enabling children with dyslexia to deal with their condition. The IRS determined that the children were attending the school for the principal purpose of obtaining medical care in the form of special education required for the years in which the children were diagnosed as having a medical condition (including dyslexia) that impaired their ability to learn. As a result, the IRS ruled in favor of a medical expense deduction for the tuition paid to the school.

More recently, in Letter Ruling 200729019, the IRS ruled that a school that provides non-academic training and support services designed to help an individual be successful in another academic or vocational school may be deemed a “special school.” The school included a student population with IQs ranging from low average to gifted and with various learning disorders and ASDs. It designed a self-contained program for the child (who had severe developmental disorders due to a medical condition) as prescribed by her neuropsychological report to enable her to compensate and overcome her diagnosed medical condition and help her succeed in transitioning to college.

Costs of additional services provided by schools that do not otherwise qualify as special schools can also be considered deductible medical expenses if the additional services provide therapeutic value. However, while a separate payment is not required, the amount paid must be in excess of the normal tuition charged for regular students, with the premium incurred over and above normal tuition representing the qualifying medical expense. An allocation may be permitted even if the school does not distinguish between normal educational tuition and medical care in its billing (Fischer, 50 T.C. 164 (1968)).

The medical care determination does not depend on the title of the person rendering the service, the nature of the institution, or whether it is considered medical care to other individuals. Instead, the final determination depends on whether the care qualifies as medical care under Sec. 213. Examples of deductible medical expenses include the additional cost incurred for special programs assisting psychologically, physically, or neurologically impaired students; note takers for deaf students; or psychotherapy services to assist students in adjusting to a normal school setting (see Rev. Rul. 69-607; Fischer, 50 T.C. 164 (1968); and Fay, 76 T.C. 408 (1981)).

Other deductible medical expenses include prescribed vitamin therapy; hyperbaric oxygen therapy; chelation therapy; equestrian therapy; individualized or group art, dance, music, and play therapies; summer camps, etc.

Parts 2 and 3 will conclude this week.

By Thomas M. Brinker Jr. and W. Richard Sherman

Edited and posted by Harold Goedde CPA, CMA, Ph.D. (taxation and accounting)