Monday, April 20, 2015

Special Needs Require Special Deductions

Over the years I have worked with many families with special needs kids. I am amazed at their strength and the resilience of their spirit. The term "Special Needs" now encompasses more than what it used to and rightly so. It is truly phenomenal that studies show that the number of children diagnosed with autism, Asperger's syndrome and many other neurological disorders continue to skyrocket. A recent report by the Centers for Disease Control estimated the rate to be as high as 1 in 50. 

We know how disruptive the lives of families with special needs dependents are, which is only compounded by the fact that the costs of providing care to the dependents are very high. To further complicate things, parents or care-givers are not aware of possible tax deductions that can help alleviate some of these costs and they unknowingly forgo tax deductions or credits. 

In this blog post, let's take a look at the various potential tax benefits that can help parents/ care-givers of special needs individuals: 

The Dependency Exemption:

The dependency exemption under § 152(c)(3) includes the so-called "age test", where an individual must be under the age of 19 at year end, the individual must be a student under the age of 24, or the individual must be totally or permanently disabled at any time during the year. § 152(c)(3) was amended in 2009 to include a rule that the person claiming the dependent must be older than the qualifying child. Age is not relevant in determining the dependency exemption of an individual who is permanently and totally disabled. 

§ 22 (e)(3) states that an individual is permanently and totally disabled if he or she is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months. A physician must certify in writing that the individual is permanently & totally disabled. 

Special School Instruction Deductible as Medical Expenses:

According to Regs. Sec 1.213-1(e)(1)(v) the unreimbursed cost of attending a "special school" for a neurologically or physically handicapped individual is deductible as a medical expense if the principal reason for sending the individual to the school is to alleviate the handicap through the school’s resources. 

As long as these expenses exceed the 10%-of-the-adjusted-gross-income floor in 2013 & beyond,expenses paid to a special school are deductible on Schedule A as part of Itemized Deductions.  

Recent IRS Letter Rulings & Revenue Rulings have expanded the definitions of special schooling. 

Capital Expenditures: 

To secure a current medical expense deduction for a capital expenditure, the cost must be reasonable in amount and incurred out of medical necessity for primary use by the individual requiring medical care.

Qualifying capital expenditures for medical expense deductions fall into two categories:

  1. Expenditures improving the taxpayer’s residence while also providing medical care                                                              and 
  2. Expenditures removing structural barriers in the home of an individual with physical limitations.

Under either of the above category, costs incurred to operate or maintain the capital expenditure, such as increased utility and maintenance costs, are deductible currently as medical expenses as long as the medical reason for the expenditures continues to exist.

Conferences & Seminars: 

If as a parent or a guardian of special needs children, you have to attend medical conferences and seminars to learn more about their disability, the amounts paid towards registration fees and travel are deductible as medical expenses under Rev. Rul. 2000-24. There should be a physician recommendation, and the seminar should deal directly with the disability. 

State deductions: 

Many states provide deduction on the state tax returns which are in addition to the above, please check with your Enrolled Agent about the specific U.S. state you live in. 

Bibliography: Revenue Rulings; Letter Rulings; Pub 502; Journal of Accountancy Articles. 

As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website,

Sunday, April 5, 2015

Aliens: Non Resident or Resident- What Is Your Status?

Star Trek came much later to Indian television, growing up, I was always a big fan of the science fiction stuff, every Sunday morning my brother & I would be glued to the telly waiting for the next episode of "Star Trek",not even the tantalizing smell of special Sunday breakfasts would get us to budge from our spots. Many, many re-runs of the Star Wars series and the cult movie, E.T later, when I landed in the United States, I was amused to find out that I was considered an "alien"! 

Of course, that was not meant as a "stranger-landing-from-a-space-ship" kind of an alien, but it was more as a sedate, ubiquitous immigrant alien. So let's get to the mundane type of complicated rules to determine - for income tax purposes- if you are an alien, that is, not an U.S. citizen, there are certain criteria you have to examine. 

Are You A Non-Resident Alien/ Resident Alien Or Both In The Same Year?

You are considered a non-resident alien, unless you meet one of the two tests. If you do then you are considered a resident alien. 

  • The Green Card Test:   
You are a resident for tax purposes if you are a lawful permanent resident of the United States at any time during calendar year. One would generally have this status if they possess a Green Card issued by the U.S. Citizenship and Immigration Services (USCIS). You would continue to be considered a lawful permanent resident unless the Green Card was taken away or it is administratively or judicially considered abandoned. 

  • The Substantial Presence Test: 
You will be considered a U.S. resident for tax purposes if you meet the substantial presence test for the calender year. {More about substantial presence on my post here}
To meet this test, you must be physically present in the U.S. on at least: 

1. 31 days during the calender year and

2. 183 days during the 3 year period that includes the current year and the previous 2 years, counting-

      a. All the days in the current year and

      b. 1/3 of the days you were present in 2013, and

      c. 1/6 of the days you were present in 2012.

  • Dual Status Aliens:

You can be both a resident alien and a nonresident alien in the same year. This usually happens either in the year you arrive in or depart from the US. If this applies to you than you are a 'dual-status" alien. Dual status does not refer to your citizenship, it only refers to your resident status in the U.S. To determine what your income-tax liability will be for a dual-status year, different rules apply for the part of a year you are a resident & the part you are a non-resident.

It is important to remember that there are restrictions for dual-status tax-payers. You cannot use the standard deduction, the head of household tax table, you cannot file jointly, you cannot claim the education credits, the earned income credit, or the credit for the elderly or the disabled.

Please contact an Enrolled Agent if any of the above apply to you.

BIbliography: Publication 519

As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website,