Sidney Kess ()
According to the last census, nearly one in five people in the U.S. had a disability. Whether a physical, mental, or emotional disability results at birth or arises as some other point during a person’s life—from an accident, service-related event, or otherwise, the financial cost of care can be substantial. The tax law provides some relief for taxpayers and their families for various costs related to having special needs. And there are some favorable rules for certain types of income received on account of disability. Here is a summary of the tax rules related to the disabled.
Equipment, Home Modifications
Equipment needed by a disabled person and certain home modifications to accommodate a disability may be treated as a deductible medical expense. These and other out-of-pocket medical costs are deductible to the extent they exceed 10 percent of adjusted gross income.
Equipment. While insurance may cover some costs, a disabled person may have to pay some or all of the cost of certain equipment. Examples of deductible items (to the extent out of pocket) include:
• Braille books and magazines to the extent the price is more than that for a regular printed edition.
• Guide dog or other service animal
• Special telephone equipment for the hearing-impaired
• Wheelchairs or autolettes (cost and maintenance)
Home modifications. Improvements that do not increase the value of the home are a fully deductible medical expense. Examples:
• Constructing entrance/exit ramps
• Relocating electrical outlets, cabinetry, etc.
• Installing railings, support bars, handrails, and grip bars
• Widening doorways
If an improvement increases the value of a home, the portion of the expense that does not give rise to the increase is a deductible medical expense. For example, the installation of an elevator or swimming pool for a disabled person may be a deductible medical expense, but only for the portion of the cost that does not increase the value of the home. An appraisal is advisable to establish value in order to determine the deductible portion of the installation.
Caring for a Disabled Person
It has been estimated that the cost of raising a child with autism or other intellectual disability is estimated at $2.4 million, according to an article in JAMA Pediatrics. Claiming a child and dependent care credit is one way to reduce the cost, albeit only a very minor amount (Code §21).
Usually the credit is limited for the care of a child up to the age of 13 so a parent can work. However, the credit can also be claimed by a person who is caring for a spouse or a child of any age who is physically or mentally incapable of self care and who lives with the caregiver for more than half of the year.
Only expenses up to $3,000 for the person being cared for can be taken into account ($6,000 for two or more such persons). The credit is a percentage of these costs, which varies with the caregiver’s adjusted gross income. The maximum credit is $1,050 (35 percent of $3,000); the minimum credit is $600 (20 percent of $3,000).
There are no federal tax breaks for respite care, which is care of a disabled person to provide relief for a caregiver. Some states are taking the initiative here. For example, Maine has a tax credit for adult day care and respite care expenses.
A disabled person who works can deduct certain costs as a business expense. These include costs necessary to enable the person to work.
For a disabled person with a job, the costs are treated as a miscellaneous itemized deduction. As such, only total expenses in excess of 2 percent of adjusted gross income are actually deductible. And they are not deductible for purposes of the alternative minimum tax (AMT). For a disabled person who is self-employed, the costs are fully deductible (e.g., a sole proprietor claims the deduction on Schedule C). If deductions are claimed as a business expense, then they cannot also be treated as a deductible medical expense.
States can establish special savings programs, called ABLE accounts, for the disabled that can be used without causing the loss of government benefits under means-tested federal programs (Code §529A). While contributions are not tax deductible for federal income tax purposes, earnings grow tax deferred. Withdrawals to pay for qualified disability expenses are tax free. These include costs for:
• Administrative services
• Assistive technology
• Education, housing, and transportation
• Employment training and support
• Expenses for oversight and monitoring
• Financial management
• Funeral and burial expenses
• Health, prevention and wellness
• Legal fees
• Personal support services
ABLE accounts are now operational in nearly half of states, including Florida, Nebraska, North Carolina, Ohio, and Tennessee. Find a complete listing at The Arc.
Credit for Elderly and Disabled
There is a credit for the elderly and disabled (Code §22), but due to income limits and other restrictions, it is not widely used. Essentially, anyone receiving Social Security benefits cannot take this credit. Of the more than 150 million individual income tax returns filed for 2015, only about 48,000 claimed the credit. More details about this credit are in IRS Publication 524.
A disabled person may receive various types of disability income. This income may be tax free, partially taxable, or fully taxable.
• Social Security disability. Payments to a disabled person are taxed in the same way as Social Security retirement benefits (Code §85). This means that benefits may be tax free or includible in gross income at 50 percent or 85 percent.
• Supplemental Security Income (SSI) and Disability Supplement Security Income (DSSI). These payments are fully tax free.
• Workers’ compensation. Payments on account of a work-related sickness or injury are tax free.
• Military and government disability pension. As a general rule, payments received on account of disability are tax free. These include VA disability benefits and related benefits (e.g., VA’s compensated work therapy program)
In addition to disability income, a disabled person may receive other income, some of which may be tax free or taxable.
• Lawsuit awards or settlements. Compensatory damages for a person’s physical personal injury or physical sickness are tax free. Punitive damages are taxable. Payments for the loss of income or earnings capacity as a result of injuries in a vehicle accident under a “no-fault” car insurance policy are tax free.
• Long-term care insurance. Payouts under a long-term care policy are tax free, regardless of amount.
• Accelerated death benefits. These benefits paid from a life insurance policy, as well as amounts received from the sale of the policy to a viatical settlement provider, are tax free if the person is terminally ill. There is no cap on the amount that is tax free. If the person is chronically ill, then benefits are tax free to the extent used to pay long-term care expenses. If the policy pays a per diem amount without regard to such expenses, then tax-free treatment is limited to a dollar amount adjusted annually for inflation ($360 per day in 2017).
Addressing the medical and personal needs of a disabled person are challenging enough. The tax law adds yet another layer of complexity to the lives of disabled people and their families. Delving into tax rules for disabled persons may, however, yield favorable results.