Tax Strategies for Families Raising Kids with Disabilities
If you’re anything like us, you probably have mixed feelings about tax preparation — you dread having to rummage through drawers to locate all your receipts and paperwork, but you also feel a tinge of excitement about the possibility of a refund. But it doesn’t have to be all bad, especially if you heed the awesome advice of Regina (Gina) M. Levy, CPA.
Levy began her career at a leading accounting firm and held a variety of accounting management positions in several industries before opening her own tax practice in 2002. The primary focus of her practice is helping families who have children or other family members with disabilities.
In December 2019, Levy wrote this incredibly helpful article for TACA (The Autism Community in Action), which lays out strategies for preparing your taxes in a way that’s clear and easy to understand. We talked to her last week to learn what changes have occurred with the pandemic, and find out what advice she has for parents this year.
Levy says the most important thing to note is that you can deduct medical expenses that exceed 7.5% of your adjustable gross income (AGI), and that this number will not change. “It was supposed to increase to 10% this January, but it won’t happen, and it will never happen; parents don’t have to live in fear of paying medical bills by a certain date,” she says. (This hasn’t yet been updated in the TACA article, but she has alerted them to the change.)
Levy’s article includes a thorough list of costs that are considered medical and can be deducted. She says the main updates for this year are related to distance learning: “If you physically changed your home so that your child could more appropriately participate in Zoom classes because of their disability (such as increasing soundproofing or installing special seating), that would be considered a medical expense.”
She added that this also applies to buying noise-canceling headphones or a bouncy ball for them to sit on, noting that you should be working with your doctor and therapist for these recommendations, and that to deduct these costs, you’ll need to have it in writing (for example, “On [X] date, Dr. [X] recommended noise-cancelling headphones to help [X] focus on distance learning”). “If you don’t already have it in writing, ask your therapists and medical providers for a letter or email to memorialize the recommendations,” Levy says.
Because of the pandemic, many therapy appointments are now being done remotely from home. Levy tells us that you can deduct whatever you needed to buy, such as therapeutic equipment or toys for OT and speech therapy, so that you have the things your child needs in the home. Again, you’ll need to have the recommendation in writing.
Levy explains that you can use IHSS income to qualify for earned income tax credits if you want, but that most Californians will be getting more than $40,000, which pushes them out of the earned income credit scheme. She notes that it might make sense if you only make about $20,000 from IHSS, as most IHSS providers have secondary sources of income. If you’re an IHSS provider for your child and they live with you, you’ll have to certify with the state that the child lives in the same household.
If you’re heard about Proposition 19, which “allows homeowners who are over 55 years of age, disabled, or victims of a wildfire or natural disaster to transfer their assessed value of their primary home to a newly purchased or newly constructed replacement primary residence up to three times,” you may have questions about the legal ramifications for special needs trusts. Levy recommends watching three short videos created by the Dale Law Firm for clarity on these issues. (You can access those videos here, here, and here.)
“Anyone who owns a home that has a child with disabilities under the age of 18 or who is conserved needs to learn about Proposition 19, as it changes the parent/child transfer rules and how you want to plan for inheriting property with a Special Needs Trust,” Levy says, noting that it’s a complicated change and it’s not the same for everybody. The Special Needs Alliance is another great resource for information about financial and property planning.
Levy wants everyone to know that respite hours are not taxable income, and that Regional Centers in California should not be issuing 1099 forms for this: “If they are, you should fight it and not include it in your tax return,” Levy says. Respite hours are a reimbursement of expenses. “You aren’t in the business of caring for your child, so you shouldn’t be paying taxes on that.”
Reimbursement from the School District
If you pay for services out of pocket with the expectation that the school district will reimburse you, you can write them off, Levy says, but cautions that it gets a bit tricky. “If the district reimburses you in the same year, it’s a non-issue; you don’t deduct if you’ve been reimbursed. But let’s say you paid out of pocket for three years and the district reimburses you in the fourth year for all of it, you would deduct years one, two, and three, and the reimbursement is taxable income in the fourth year.”
If you’re a Regional Center client, Levy recommends making sure your IPP includes everything you do for your child: “If you’re audited and the tax person wonders why you’re claiming a medical deduction for the wobble seat your kid sits on, if it’s stated in the IPP that your child needs a OT seat, then that’s medical. Include everything you’re paying for out of pocket so it’s documented — you want your responsibilities to be clearly defined in the IPP.”
If you’re not with a Regional Center, you’ll still want to document everything. “Make sure to take notes when you have your annual visit with your pediatrician, and give your tax person a copy of your notes to show that you’re working with a medical professional,” Levy advises.
For more, be sure to check out Levy’s article; though she’s not currently taking new clients, she is happy to help on a case by case basis, and may also be able to speak with your tax professional.
Note: The information in this article is educational in nature and is not to be considered tax advice. Please contact a qualified tax professional to discuss how these concepts may or may not apply to your personal situation.