Raising a child with a disability can be expensive. For example, the lifetime cost of raising a person with autism can be as much as $2.4 million, according to Autism Speaks, and raising dependents with other disabilities can be even more expensive. High taxes on top of already high costs can be a burden on families. And while the IRS doesn’t offer specific tax credits for children with special needs, some caregivers can take advantage of these credits to reduce their tax bill.
IRS Rules for Claiming Children with Disabilities
Having a child with a disability can affect your taxes. For example, the Earned Income Tax Credit (EITC) is a refundable tax credit, meaning you can get all or part of the credit as a refund. The amount of the credit is calculated, in part, based on the number of qualifying children you have. The IRS considers any child who has a total or permanent disability to be eligible for the credit, regardless of age.
(Note: Generally, a “qualifying child” must be under the age of 19, or under the age of 24 if a full-time student).
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Childcare for children with special needs
If you pay for child care for a child with special needs, you may be able to claim the child and dependent care credit, even if your child is over 13. This credit generally only applies to children under 13. However, if the IRS considers your dependent to be “disabled” (more on this below), you may be eligible for the credit.
This credit is nonrefundable, which means that although you can reduce your taxes to zero, you can’t take any part of it as a tax refund. The child and dependent care credit is worth up to $1,050 per qualifying dependent. If you have two or more qualifying dependents, the maximum credit is $2,100.
Benefits of an ABLE Account
An Achieving Better Life Experiences (ABLE) account is a state savings program that helps parents or guardians pay for qualified disability-related expenses. While investment income is generally taxable, investment income from an ABLE is not taxed if distributions are used to pay for qualified expenses.
Plus, some states offer a tax deduction for contributions to a qualified ABLE account. But before you open an ABLE account for your child, there are some important things you should know.
If the savings in an ABLE account exceed $2,000, your child may still be able to collect Social Security disability benefits. The beneficiary must be diagnosed with a disability before turning 26. The annual contribution limit is generally equal to the gift tax exemption ($18,000 for 2024). Rules and potential benefits vary by state.
Special Needs Child Tax Credit
To deduct medical expenses on your tax return, you must itemize deductions (rather than take the standard deduction). However, you may be able to deduct more than just the cost of doctor’s visits and tests. Improvements you make to your home to care for a disabled dependent may qualify as a medical expense.
Additionally, you may be able to claim dependent care expenses as a medical deduction, as long as you don’t use the same expenses when claiming the child and dependent care deductions. If your child has a service animal, you may also be able to deduct the cost of maintaining the animal (veterinary visits, food, etc.). Other expenses may also qualify as medical deductions.
Even if you don’t itemize deductions, you may be able to use Health Savings Account (HSA) funds to pay for home improvements or a service animal if you have a medical need (more on that below).
If you choose this method, be sure to follow the proper procedures and keep proper records.
A CPA or other qualified tax professional can help you determine which expenses qualify as HSA-eligible expenses and which medical expenses are deductible.
Special Education Tax Credit
Some tax-advantaged savings accounts allow exceptions to the rules for disabled beneficiaries. For example, education expenses typically aren’t considered eligible expenses in an FSA (Flexible Spending Account) or HSA.
These types of accounts allow you to pay for qualified medical expenses with tax-free dollars, except that special education tuition fees may be eligible for reimbursement if you have a Letter of Medical Necessity (LMN).
(Note: a letter of medical necessity is a document in which a medical professional determines that services are necessary to treat an illness or condition).
Who is considered “disabled” by the IRS?
For the IRS to consider your dependent a “disabled” child, your child must have a disability that meets one of the following criteria:
The disability must have been continuous for at least one year. The disability must have been continuous for at least one year. The disability may result in death.
You may need to provide proof of your child’s disability to the IRS. Acceptable proof includes a letter from a doctor or social service agency defining the disability.
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