03 02 11 PNEM Presentation | Employee Benefits | Deductible

Tax Issues for Special Needs Families

MARK L. BERGER, CPA & KIM MACK ROSENBERG
•  MARCH 2, 2011

1

Autism Is Challenging

•  Like many other illnesses, autism presents a host of

significant challenges to families.
•  Among those are monetary challenges, which can

cause both financial and emotional strain.
•  Financial planning is critically important. •  A key component of that planning is tax planning and

understanding appropriate deductions available to your family.
2

The Autism Puzzle is Complex
Many of our children with autism spectrum disorders need significant, specialized assistance and treatments, including, among others:
•  Therapies, such as speech, OT and PT •  Medical specialists •  Private special needs schools •  Medications/supplements •  Special diets •  Assistive communication devices •  Specially-trained caregivers
3

Autism is Expensive
•  The various forms of assistance that our

children need are expensive.
•  Often the cost is not covered by insurance

or, if covered, is not covered in full.
•  As a consequence, families often spend a

significant portion of their income to help treat their child s medical issues.

4

The Tax Puzzle
WE ARE HERE TONIGHT TO HELP YOU WITH ANSWERS TO A FEW KEY QUESTIONS:
•  •  • 

Are any of my expenses tax deductible? What are the limits on deductibility? I am drowning in paper … how do I document my deductions and organize my paperwork?
5

Medical Expenses

Pub. 502 at p. 2.

6

Medical Expenses (cont d)
!  Medical expenses are expenses paid during

the tax year at issue, regardless of when the medical care was given. See Pub. 502 at p. 3.
!  Whose medical expenses am I allowed to

deduct? See Pub. 502 at pp. 3-5 for the definition of who qualifies as a dependent for medical expense purposes.
7

Which Expenses Are Includable?
!  The IRS provides an extensive list of includable

medical expenses at pp. 5-14 of Pub. 502.
!  There also is a list of not includable expenses in

Pub. 502 at pp. 14-16. It is important to look at these as well. Often exceptions to the not deductible definition actually allow deductions for some of the medical care needed by special needs children.
8

A Few Examples of Includable Expenses:

!  Acupuncture !  Chiropractor !  Lab Fees !  Long-Term Care

. . . We will discuss many others tonight as well.
9

7.5% Rule

Medical expenses up to the first 7.5% of Adjusted Gross Income ( AGI ) are not deductible. See Pub. 502 at pp. 2, 3.
!  AGI appears on lines 37 and 38 on your 1040. !  For example if your AGI is $100,000, the first $7,500 of

medical expenses are not deductible ($100,000 x 7.5%).

10

Alternative Minimum Tax ( AMT )

!  For AMT purposes, medical expenses up to

the first 10% of Adjusted Gross Income are not deductible. Taxpayers who are subject to AMT will have an AMT adjustment excluding medical expenses for an additional 2.5% of their AGI.

11

Medical Deductions and Issues Pertaining to Special Needs Families:
!  Tuition for a therapeutic school generally will qualify

as a medical expense. See Pub. 502 at p. 13.
!  While some legal fees are deductible (see Pub. 502 at

p. 10), legal fees incurred in trying to obtain services or tuition reimbursement from the Department of Education have been ruled not a deductible medical expense.
!  Supplements that are recommended by a medical

practitioner to treat a medical condition diagnosed by a doctor may be deductible but supplements taken for general good health reasons are not deductible. See Pub. 502 at p. 16.
12

Special Needs Deductions (cont d)
!  Homeopathic treatment, as long as it is prescribed

by a medical doctor, should be deductible.
!  Chelation therapy costs should be deductible if the

treatment is prescribed by a doctor.
!  Therapeutic toys/tools should be deductible if

accompanied by a letter from a doctor substantiating that the item is for the treatment of the child s condition.
13

Special Needs Deductions (cont d)
!  Lab fees for specialty labs like Doctors Data for

heavy metals testing (i.e., non-traditional testing) should be deductible. See Pub. 502 at p. 10.
!  Fees for non-US medical providers (such as the

French lab that runs specialized testing for porphyrins) should qualify as long as the testing is prescribed by a doctor.
!  Home HBOT (hyperbaric) chamber should be

deductible as long as it is prescribed by a doctor.
14

Special Needs Deductions (cont d)
!  Conferences (like the NAA Hopeism

Conference, Autism One, and Defeat Autism Now!): conference fees and transportation to and from conference are includable medical expenses, however meals and lodging at the conference are not includable medical expenses. See Pub. 502 at p. 11. medical care in another city may be deductible within certain limits. See Pub. 502 at pp. 10, 14.
15

!  Lodging and Travel Expenses to receive

Special Needs Deductions (cont d)
!  Transportation Expenses incurred in connection with

medical care are deductible. The limits and options with respect to transportation expenses are explained at Pub. 502 at pp. 13-14. needs child should be deductible along the same lines as conferences. See Pub. 502 at p. 11. special foods over the cost of a normal diet when the special diet is prescribed by a doctor to alleviate a medical condition. Special food that merely replaces food normally consumed is not a deductible medical expense.
16

!  Books to help parents understand and help their special

!  Food for Special Diets: Tax courts have allowed the cost of

Special Needs Deductions (cont d)
!  Therapeutic summer camp may be deductible for children who require

year-round therapeutic services if the camp provides such services and your doctor/neurologist/child psychiatrist prescribes it as essential. helps their owner minimize the effect of their disability and helps the owner to perform everyday tasks. The IRS allows the cost of buying, training and maintaining a service dog as a medical expense. Veterinary expenses, food, and licensing would be considered maintaining the dog and, therefore, also would be considered medical expenses.

!  Autism service dogs may be deductible as a medical expense if the dog

!  An iPad that is used primarily as a communicative/therapeutic device

for a person with autism may be deductible as a medical expense. Apps which assist in using the iPad as a communicative/therapeutic device, such as Proloquo2go (a speech app), also would be deductible. An iPad that is used for play or used primarily for purposes other than as a communicative/therapeutic device would not be deductible.
17

Typical or Mainstream Classes
!  Typical classes, such as martial arts or swimming, that

a therapist/doctor recommended may be deductible so long as the class is considered essential to treating the child s condition.
!  You should obtain a written recommendation from

the child s doctor stating that, for example, a child needs socialization with typical peers and that going to such a class is an essential part of the child s treatment.
!  Classes/lessons taken to improve general health are

not deductible expenses. See Pub. 502 at pp. 15, 16.
18

Other Things to Consider

Tax Status: Married Filing Separately. Married couples should consult with their tax professional to determine if, in order to maximize the tax benefit of medical deductions, the married filing separately status should be considered. Reimbursements generally reduce medical expenses in the year the reimbursement is received. In some cases, reimbursements may be taxable. See Pub. 502 at pp. 16-19. This is particularly important for large deductions – such as tuition at a special needs school– that may be reimbursed in whole or in part in a different tax year.
19

Employer Plans
!  You should evaluate employer-provided plans such as a

Flex Spending Plan because it gives you the opportunity to pay for medical expenses with pre-tax earnings.
!  Medical expenses reimbursed by a flex spending plan do

not qualify as medical expense for tax deduction purposes.
!  Insurance premiums paid with pre-tax dollars (which is the

case for many employees) are not deductible. If you are self-employed, these premiums may be subject to different tax treatment (not as a medical expense).

20

Timing of Receiving Tax Benefit
!  What is the quickest way to get the benefit of a tax

deduction of a medical expense?
For salaried employees – adjust the payroll withholding on your W-4 form to incorporate the anticipated medical expense deduction for that tax year. !  For self-employed individuals who are paying estimated taxes – adjust the quarterly estimate payment to incorporate the anticipated benefit of the medical expense deduction. !  For those people who missed the medical expense deduction in a previous year, you can amend your previous year s income tax return. You can do this for tax years where the statute has not expired. The statute runs 3 years from the date of filing your return.
! 
21

Recordkeeping

22

Always Keep Medical Records/Receipts

!  Even if you don t think you will qualify for a medical

expense deduction, save your receipts. Unfortunately, you never know when a catastrophic medical bill could hit and put you over the 7.5% bar, or, in these tough economic times, when a change in employment circumstances could reduce your income. expenses relating to children with special needs, save medical receipts for ALL family members – everyone who qualifies as your dependent for medical deductions counts and the co-pays and other expenses do add up.
23

!  Even though we are focusing tonight on deductible

Doctor s Letter
!  Get a letter from a doctor substantiating your child s need for

treatments like OT, PT, Speech Therapy, supplements, special equipment, the need for you to attend conferences/buy books related to your child s condition or treatment. Keep this in your general tax file.
!  Many pediatricians will provide such a letter. Other specialists your

child sees might as well (e.g., neurologist, developmental pediatrician, Defeat Autism Now! doctor, mitochondrial specialist).
!  Depending on the treatments you use, you may need letters from more

than one doctor.
!  It may help for you to draft the letter for your doctor, have the doctor

review and approve before signing. If you make this an easy step for your practitioners, they are usually amenable to helping you – they want your child to get the treatments he or she needs too!
24

So you have a receipt from a doctor or therapist . . . What now?

– OR – I AM SWIMMING IN PAPER AND DON T KNOW WHERE TO START – WHAT DO I DO WITH ALL OF THIS STUFF???

25

Substantiating Your Deductions
!  Keep in mind what the IRS generally is looking for:

Pub. 502 at p. 20.

26

Basic Tips
!  Find a system that works for YOU! A system can be the greatest system

in the world but if it does not work for you, it will work against you and you won t use it.
!  Many people use programs like Quicken to track their financial

information. Especially if you prepare your taxes yourself using TurboTax or similar products (http://www.turbotax.intuit.com), these programs can be very helpful in organizing some of your information.
!  File regularly – figure out what works for you – that may be daily, weekly,

or monthly. If your paperwork builds up, items may go missing and the task becomes too daunting.
!  Consider dedicating a pocket of a handbag or tote, a compartment of your

wallet, or a small coin purse or envelope as the spot for storing receipts on the go, this way, they are all together for filing in your at-home system.
27

File Systems
!  There are many purveyors of filing/paper storage

systems, some of my favorites include:
!  the

Container Store (www.containerstore.com) !  Staples (www.staples.com) !  Target (www.target.com) !  www.organize.com !  www.seejanework.com !  www.stacksandstacks.com ….to name just a few!
28

My System
! Two plastic file folders

from the Container Store:
"  They

are sturdy (more so than paper files) "  They are expandable "  They are portable (and they close) "  I use two sizes so that the generally smaller receipts (taxi, gas, etc.) don t get misplaced

29

My Categories
!  In the Large File:
! 

!  !  !  !  !  !  !  !  !  ! 

Flex to Submit (keep some blank submissions forms here too) Flex Spending Pending Flex Spending Paid Insurance to Submit (keep some blank claim forms here too) Insurance Pending Insurance Paid Practitioners (not submitted to insurance) Supplements Labs Books/Therapeutic Toys & Tools Other

!  In the Small File:
!  !  !  !  !  ! 

Taxi Gas Tolls Rental Cars Grocery Prescriptions

30

Submitting to Insurance
!  If you think an expense may be covered by your insurance, submit

it to your insurer first.
!  Submit claims separately, one claim per envelope. Claims are less

likely to be lost if they arrive separately (even if you mail several on one day). If you submit too many in one envelope it is more likely that one will get misplaced or skipped. Your insurer may also accept faxed claims. Faxes have the benefit of proof of receipt.
!  Keep a copy of your claim form and the receipt from your

provider. Even with information available online from many insurers, the online information is no help if they lose your claim before processing it. This copy gives you all the information you will need to resubmit, if necessary.
31

Submitting to Insurance (cont d)

!  Staple your copy of the claim form and your receipt

together and note at the top the date you submit it to your insurer and the method you used to send it (e.g., Fax 1/1/10 USPS 2/2/10 ) – this helps if you need to follow up with your insurer.
!  File these documents in an Insurance Pending file. !  If your doctor files claims from his or her office or if

you file electronically, keep a record of visits and follow up on whether your claims have been processed.
32

Unreimbursed Amounts and Employer Plans

!  When you receive your explanation of benefits

( EOB ) from the insurer, make sure it is accurate and, if so, staple the EOB to the claim form and receipt (I like to staple it on top so I know I have heard back from my insurer on that claim). Insurance Paid file.

!  If it has been paid in full, move the packet to your !  If not, and if you have a Flex Spending plan, consider

submitting anything not paid by insurance to Flex Spending.

33

Unreimbursed Amounts and Employer Plans (cont d)
!  Attach your Flex Spending form to the EOB/claim

form/receipt and note the date you submit it and the method you used to submit it.
!  Move the whole thing to your Flex Spending

Pending file.
!  If Flex Spending pays the remainder in full, keep the

documentation, along with your paperwork received from Flex Spending in your Flex Paid file – You don t want to commingle flex paperwork with your tax receipts if Flex Spending paid the balance of your claim.
34

Potentially Deductible Amounts
!  If Flex Spending did not pay a claim in full, if

you do not have Flex Spending Benefits, or if you have exhausted your flex benefits for the year:
! 

Your stapled documents for this claim can now go to the Insurance Paid file. You can note on the document the amount that is now potentially tax deductible after insurance and/or Flex Spending reimbursement. This makes it easy at tax time to identify your potential deduction on that claim.
35

! 

Potentially Deductible Amounts (cont d)
!  You will need to trace through your EOB and Flex

Spending receipt to do this.
! 

!  Ask yourself:
Did your insurer disallow part of your claim? What amount? Was there a co-pay? What amount? What portion of your out of pocket (co-pay and disallowed amounts) did Flex Spending pay?

!  ! 

!  The remainder is the number you will need for tax

purposes.

36

Reading an EOB
!  You need to familiarize yourself with your insurer s EOB to

determine what your deduction is on a given claim.
!  Your deductions are based on what remains after the charge is

reduced based on any agreement your provider may have with the insurer and after your insurer pays its share.
!  Your deductible amounts may include:
! 

not covered amounts (to the extent these do not represent fee reductions) Co-pays Deductibles Co-insurance (for example, if you have a 70/30 plan – your 30% share of the allowed charge is a deductible amount)
37

!  !  ! 

Reading an EOB (cont d)

38

Reading an EOB (cont d)
The Provider Charge If you are responsible for this amount, it is deductible

Co-Pays are Medical Expenses

Any remaining amount on your annual deductible that you had to pay on a claim

If this is less than 100% you can calculate a further deduction here
39

Other Documentation and Helpful Hints
•  Use your Flex Spending dollars wisely. Expenses not covered by

insurance may still be eligible for Flex Spending. These items even include some OTC medications. Consult your Flex Spending account information on reimbursable items. If you can use pre-tax dollars to be repaid for items that are not tax deductible, it might make sense to use Flex Spending dollars for those items before potentially tax deductible items.
•  The best practice is to keep receipts and to document everything in case

of an audit.
•  Remember that expenses, such as shipping from a compounding

pharmacy, should be deductible. Likewise, transportation cost to a health food store if the primary purpose is to obtain special diet foods and shipping special diets food from an internet site also should be deductible.
40

Other Documentation (cont d)
!  If you use your car in connection with medical expenses

and will take the standard medical mileage rate deduction, you should keep a mileage log (you can even keep it in the car to be sure to have it when you need it). If you take certain trips regularly, you should note the mileage for those trips in your log once and you can then reconcile to your calendar either regularly or at year-end. (especially for transportation-related receipts that do not look medical on their face) to the dates on which you received medical care . are ready for organizing at tax time.

!  You can use a calendar or log book to reconcile receipts

!  File receipts promptly in the appropriate file so that they
41

Other Documentation (cont d)

•  Try not to pay medical expenses with cash – credit cards

and checks are easier to substantiate.
•  Credit card monthly statements. I keep each card s

statements in a separate file. At tax time I take them out and make copies, highlighting the various expenses (often they span categories and also include things like charitable deductions) and I keep these copies in a general tax file as additional backup.
•  Make sure your family/caregivers are all on the same

page with respect to saving receipts.
42

Transportation Receipts – Taxis
!  Save items such as taxi receipts for travel to/from

appointments.
!  Paying with a credit card creates another check for

the purpose of a ride, you can reconcile your statement with your calendar.
!  Even though individually these receipts are usually de

minimis expenses, if this is your primary mode of transportation with your special needs child to school/appointments, the total dollar amounts spent will be significant and it may be a good idea, in case of audit, to be able to substantiate these amounts.
43

Transportation Receipts – Buses/Subway
!  Buses and subways are harder to keep track of:
" 

Consider getting a Metrocard (or more than one – for example, one for you and one for your babysitter) that you designate as a MEDICAL Metrocard (you can even write it on the card so that you use the correct one). Use that card only for its designated purposes. When you refill the card, you can get a receipt and use that to track the amount you spend. You can get an automatically refillable Metrocard from the MTA website (http://www.easypaymetrocard.com) that keeps track of where the card is used. Your online account history retains information for four months and indicates the date and time of use, as well as the bus number or subway stop location. Your calendar or log can help track the dates and reconcile receipts to medical appointments, etc.

" 

" 

" 

44

Transportation Receipts – Cars

!  Per the IRS, you can deduct the larger of either 16.5¢

per mile for car travel for a medical purpose or your actual expenses (gas and oil primarily). Tolls and parking are deductible in addition to either actual costs or the statutory per mile deduction.

45

Maximizing Your Car Expense Deduction

Pub. 502 at p. 13.

46

Planes, Trains, and Automobiles

Out of Town Medical Travel Expenses
!  The cost of travel is deductible if you travel to another city

for medical care. The medical care must be the primary purpose of your trip. A parent s travel expense is deductible when the parent is traveling with a child in need of medical care.
!  Lodging (at $50 per person per night) also is deductible

when traveling out of town for medical treatment.
!  Meals are not deductible (except for the patient in a

hospital or similar facility).
47

Getting Ready to File Your Return
"  Well

before your tax return is due to be filed, organize your paperwork (again, this should be done regularly throughout the year). each category of expenses, organize the documents in a way that works for you (for example, all EOBs in chronological order or EOBs separated by provider and then in chronological order by provider).

"  For

48

Create Your Own Spreadsheet
!  Create a document (in a word processing or spreadsheet program

with which you are comfortable) that allows you to track the expenses by category or groups of categories. Even a table in a word processing program can add a column of numbers (formula function). You can include columns for:
!  !  !  !  ! 

Category of expense (e.g., prescription, doctor, lab) Provider name Which family member incurred the expense Amount of potential deduction Type of documentation to support payment/amount (EOB, receipt, credit card statement)

!  You can use the same document and save it as a new version each

year and simply adapt it to any changing needs – no need to reinvent the wheel.
49

Create Your Own Spreadsheet (cont d)

!  This document will help you and your tax preparer

prepare your return more efficiently.
!  If you use Quicken or similar programs, the

program may help you organize this information.

50

My child is on a special diet, can I deduct the cost of her special foods?
!  As was discussed earlier, under certain

circumstances, the difference between the cost of the special food and an equivalent normal grocery item is deductible.
!  If your child is on a special diet, it may be worth

tracking this information for a few months to see if this is a worthwhile deduction for you.
!  There is no way around the fact that tracking this

is tedious.
51

Special Diets (cont d)
!  You may be able to use a website like

http://www.freshdirect.com to determine the cost of normal equivalents.
!  There is definitely some math involved here,

especially if your special product and the regular equivalent are sold in different sizes.
!  http://www.tacanow.org has a handy template on

their website.

52

Special Diets Math
!  Flours are a great example of the math involved:
!  most !  To !  If

regular flour comes in a 5 lb bag but many special flours (rice, garbanzo, nut) are sold in smaller sizes. make the example easy, if a 5 lb bag of flour is $5, it is $1 a pound. the 2 lb bag of rice flour is $8, it is $4 a pound. per pound difference is $3, which you multiply by 2 (to account for your two lb bag of rice flour), for a deductible difference of $6 a bag. The $6 per bag difference is then multiplied by the number of units you purchased throughout the year.
53

!  The

After You Have Filed Your Return

•  Keep copies of everything you send your

professional tax preparer. •  After our taxes are filed, I move all my tax documentation (medical and other) to a file box, containing file folders labeled with the tax year and my various categories of receipts and other documentation (e.g., 2010 –Prescriptions ).

54

Disclaimer
The information contained herein and provided at the March 2, 2011 presentation is for informational purposes only and does not substitute for tax advice from your own tax adviser, familiar with your financial information. NAA-NY Metro and tonight s presenters makes no warranties, express or implied, as to the accuracy of information presented tonight and in this handout. As always, official sources and publications and your own tax professional should be consulted for the most current rules and regulations that may be applicable to you.
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