Year 2008 Tax Benefits for Parents of Children With LD
If you have a child with a severe learning disability (LD), you may qualify for valuable tax benefits. If your child has AD/HD or other physical, mental or emotional impairments, you may also qualify for tax benefits. Because tax laws are complex and many tax preparers often do not have occasion to use these unique tax benefits, families are at risk of losing refunds worth thousands of dollars. It's likely that 15% to 30% of families with a disabled child have one or more unclaimed tax benefits.
This guide provides a summary of the most significant federal income tax benefits and should not be considered legal advice. Tax decisions should not be made simply on the basis of the information provided here. You are advised to print out this guide and give a copy to your tax advisor. You should also explore potential state income tax benefits, which are too numerous to review in this guide.
Internal Revenue Service (IRS) "Publications" represent the most accessible form of guidance to the tax rules for the general public, and relevant IRS publications are cited for each of the tax benefits listed below. The IRS also issues interpretations of the code and regulations called "Revenue Rulings." These interpretations are formal, binding policy statements. Tax professionals rely on revenue rulings in advising clients about tax liabilities and tax benefits. For example, Revenue Ruling 78-340, discussed later, authorizes a medical expense deduction for tuition or tutoring fees paid for a child with a severe learning disability who is attending a special school at the recommendation of the child's doctor.
Tax Benefits: Deductions vs. Credits
It's important to distinguish between two categories of tax benefits. One category is a "deduction from taxable income" or simply a "deduction." The value of a deduction is based on the marginal tax rate of the taxpayer. If a person has a tax deduction worth $1,000, the actual value of the deduction will be determined by the taxpayer's tax rate. So a taxpayer in the lowest tax rate bracket, 10%, will have his taxable income reduced by $1,000 and save $100 (10% of $1,000). However, a taxpayer in a higher bracket, for example, 28%, will have his taxable income reduced by $1,000 and save $280 (28% of $1,000).
The second tax benefit is a tax credit, which is a dollar-for-dollar reduction in tax liability. An individual with a tax credit worth $1,000 will have his tax bill reduced by $1,000. This means that the actual amount of taxes is reduced by the amount of the tax credit. However, because tax laws and procedures are very complicated, other factors can influence the ultimate value to the taxpayer.
The following summarizes the principal tax benefits that may be available to families caring for children with severe learning disabilities.
Retroactive Claims for Refunds
The IRS allows taxpayers to file amended returns and collect refunds for unclaimed tax benefits retroactively up to three years. This means a taxpayer can file an amended return for the 2005 tax year (and also for the 2006 and 2007 tax years) and claim a refund if the return is filed not later than April 15, 2009. (See IRS Publication 17, "Your Federal Income Tax," 2008, pages 18-20.)
Besides Parents, Who Can Claim a Child as a Dependent?
A relative caretaker (e.g., a grandparent or aunt) or a nonrelative caretaker (e.g., a foster parent or legal guardian) may be able to claim a child as a dependent and qualify for related tax benefits. A relative caretaker and the child are not required to live in the same household. More information is available in IRS Publication 501; "Exemptions, Standard Deduction and Filing Information"; pages 9-19: http://www.irs.gov/pub/irs-pdf/p501.pdf.
Eligibility is determined by a five-part test. The most critical requirement is that the caretaker must provide more than half of overall financial support for the child. For example, there may be cases where the caretaker is making a substantial financial contribution toward LD-related expenses (e.g., private school tuition) that represents more than half of the overall cost of support for the child. In those situations, the caretaker could list the child as a dependent and claim the tuition as a medical expense deduction on Schedule A.
