Sunday, July 26th, was the 25th anniversary of the Americans With Disabilities Act. The I.R.S. recently highlighted a number of tax-advantaged benefits available to help those with disabilities and those with disabled family members. While they can require significant amounts of paperwork, these programs, deductions and credits also offer savings that can truly help with costs for care for those with disabilities.
Among the newest programs is the ABLE account, which stands for “Achieving a Better Life Experience.” These plans are based on the popular 529 educational savings plans, and allow an individual, family members or friends to contribute to an account established specifically for a disabled individual. The program is limited to individuals who became disabled before reaching age 26. Any income the account earns are free of income tax, even when distributed, but must be distributed for qualified disability expenses. In addition, total contributions to the account for any given year are limited to the annual tax exclusion ($14,000 for 2015). Any contributions above this limit are returned to the contributor, or will create a penalty for the disabled beneficiary. Programs are being set up across the country by states, and if your state does not have a plan, it may contract with another state to provide access to a plan. There are other limits on the plan, particularly if public benefits for housing are being used, but this offers a great way to help with many of the additional costs that come with disabilities without interfering with allowing the disabled individual to qualify for public benefits.
ABLE accounts are a great supplement to good estate planning for disabilities by both parents and disabled individuals.
Income tax deductions are available if taxpayers have impairment-related work expenses. There are also various unreimbursed disability-related expenses that qualify as medical expenses that can be deducted. However, medical expenses are subject to a 10% floor, meaning that they must total more than 10% of the taxpayer’s adjusted gross income before the expenses become deductible. Claiming these deductions means extra paperwork – they can only be claimed on Schedule A of Form 1040. The types of expenses that can be claimed include prosthetic limbs, contact lenses, eyeglasses, hearing aids, wheelchair costs and maintenance, the costs for the care of a guide dog, and some premiums for qualified long-term care insurance. I.R.S. Publication 502 has a detailed list of qualifying medical expenses.
Income tax credits are also available for low- to moderate-income workers and working families. These include the Earned Income Tax Credit – which is refundable, and the child and dependent care expense deductions, which can include the costs of caring for a spouse or dependent who is physically or mentally unable to take care of themselves. I.R.S. Publication 503 has more details on how to claim these tax credits.
Note that the income tax deductions and credits qualifications and calculations can be very confusing, and each year many taxpayers inadvertently misclaim the credits. The I.R.S. carefully monitors these claims for fraud and abuse, and will contact taxpayers for additional proof of qualification for these deductions and credits. Keeping receipts for costs can add to the paperwork burden for claiming these deductions and credits, but can be worth the effort.
In addition to the federal deductions and credits, many states offer similar tax-advantaged credits. For example, Washington DC offers property tax relief for disabled individuals who own their home. This will reduce the tax on the property by 50%.
There are also various other options to help care for a disabled family member, and to pay for the expenses associated with a disability. These may include special needs trusts, discretionary trusts, self-settled trusts or uniform transfer to minors (UTMA) accounts. These trusts and accounts will also require careful documenting in order to properly account for all expenditures, and the UTMA accounts may create further estate planning problems if the guardian of the account passes away before the account is distributed to the disabled individual. While each option has its own advantages, the pros and cons should be discussed thoroughly with a professional advisor before selecting an option.
Originally published 8/5/2015