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Tax Issues for Special

Needs Families

Mark L. Berger, CPA

&

Kim Mack Rosenberg

March 3, 2010

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The Autism Puzzle

We know that autism and other illnesses present a

whole host of challenges to families.

Among those are monetary challenges, which cancause both financial and emotional strain.

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Autism is ExpensiveAutism is Expensive

The various forms of assistance that ourchildren need are expensive.

Often the cost is not covered byinsurance or, if covered, is not covered infull.

As a consequence, families often spend a

significant portion of their income to helptreat their childs medical issues.

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The Tax PuzzleThe Tax Puzzle

We are here tonight to help with a few keyquestions:

Is any of this tax deductible?

What are the limits on deductibility?

I am drowning in paper how do I document mydeductions and organize my paperwork?

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Medical ExpensesSee Pub. 502 at p. 3.

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Medical Expenses (Medical Expenses (contcontdd))

Medical expenses are expenses paidduring 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. 502pages 3-5 for the definition of who

qualifies as a dependent for medicalexpense purposes

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Which Expenses Are Includable?Which Expenses Are Includable?

The IRS provides an extensive list ofincludable medical expenses at pages 5-15 of Pub. 502.

There also is a list of not includableexpenses in Pub. 502 at pages 15-17. Itis important to look at these as well.Often exceptions to the not deductible

definition actually allow deductions forsome of the medical care needed byspecial needs children.

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A Few Examples ofA Few Examples of

Includable Expenses:Includable Expenses: Acupuncture Chiropractor

Lab Fees

Long-Term Care

We will discuss many

others tonight as well.

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7.5% Rule7.5% RuleMedical expenses up to the first 7.5% of

Adjusted Gross Income (AGI) are not

deductible. See Pub. 502 p. 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%)

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Medical Deductions and Issues

Pertaining to Special Needs Families: Therapeutic School generally will qualify as a medical

expense. See Pub. 502 p. 13.

While some legal fees are deductible (see Pub. 502 p. 10),legal fees incurred in trying to obtain services or tuition

reimbursement from Dept. of Educ. have been ruled not adeductible medical expense.

Supplements that are recommended by a medicalpractitioner to treat a medical condition diagnosed by adoctor may be deductible but supplements taken for

general good health reasons are not deductible. SeePub. 502 p. 16.

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Special Needs DeductionsSpecial Needs Deductions (cont(cont

d)d)

Homeopathic treatment, as long as it is prescribed by

a medical doctor, should be deductible.

Chelation Therapy costs should be deductible if thetreatment 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 childscondition.

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Special Needs Deductions (contd)

Conferences (like the NAA HopeismConference and Defeat Autism Now!):conference fees and transportation to and from

conference are includable medical expenses;however meals and lodging at the conferenceare not includable medical expenses. See Pub.502 p. 11.

Lodging and Travel Expenses to receive

medical care in another city may be deductiblewithin certain limits. See Pub. 502 pp. 10-11,14.

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Special Needs DeductionsSpecial Needs Deductions (cont(contd)d)

Transportation Expenses incurred in connection withmedical care are deductible. The limits and options withrespect to transportation expenses are explained at Pub.502 at page 14.

Books to help parents understand and help their specialneeds child should be deductible along the same lines asconferences. See Pub. 502 pp. 11-12

Food for Special Diets: Tax courts have allowed the costof special foods over the cost of a normal diet when the

special diet is prescribed by a doctor to alleviate a medicalcondition. Special food that merely replaces food normallyconsumed is not a deductible medical expense.

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Typical or Mainstream Classes

Typical classes, such as martial arts or swimming,that a therapist/doctor recommended may bedeductible so long as the class is consideredessential to treating the childs condition.

You should obtain a written recommendation fromthe childs doctor stating that, for example, a childneeds socialization with typical peers and thatgoing to such a class is an essential part of the

childs treatment. Classes/lessons taken to improve general health

are not deductible expenses. See Pub. 502 p. 15.

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Other Things to Consider

Tax Status: Married Filing Separately. Marriedcouples should consult with their tax professional todetermine if, in order to maximize the tax benefit ofmedical deductions, the married filing separately status

should be considered.

Reimbursements generally reduce medical expenses inthe year the reimbursement is received. In some cases,reimbursements may be taxable. See Pub. 502 pp. 17-20.This is particularly important for large deductions such

as tuition at a special needs school for which you maybe reimbursed in whole or in part in a different tax year.

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What If I Had Deductions in Prior

Years That I Did Not Take?

Generally, you can amend a federal tax

return within three years of the date of filingthat return.

For example, if you filed your 2007 tax

return on April 10, 2008, you have until

April 10, 2011 to amend that return.

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Employer Plans

You should evaluate employer-provided plans such as aFlex Spending Plan because it gives you theopportunity to pay for medical expenses with pre-taxearnings.

Medical expenses reimbursed by a flex spending plando not qualify as medical expenses for tax deductionpurposes.

Insurance premiums paid with pre-tax dollars (which isthe case for many employees) are not deductible. Ifyou are self-employed, these premiums may be subjectto different tax treatment (not as a medical expense).

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Recordkeeping

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Always Keep Medical

Records/Receipts Even if you dont think you will qualify for a medical

expense deduction, save your receipts. Unfortunately,you never know when a catastrophic medical bill couldhit and put you over the 7.5% bar, or, in these tough

economic times, when a change in employmentcircumstances could reduce your income.

Even though we are focusing tonight on deductibleexpenses relating to children with special needs, savemedical receipts for ALL family members everyone

who qualifies as your dependant for medical deductionscounts and the co-pays and other expenses do add up.

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

Or

You turned me into a pack rat what do I

do with all of this stuff???

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Substantiating Your Deductions

Keep in mind what the IRS generally is looking for

Pub. 502 p. 20

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Basic Tips

Find a system that works for YOU! A system can be thegreatest system in the world but if it does not work foryou, it will work against you and you wont use it!

Many people use programs like Quicken to track theirfinancial information. Especially if you prepare your taxesyourself using TurboTax or similar products(http://www.turbotax.intuit.com), these programs can bevery helpful in organizing some of your information.

File regularly figure out what works for you that maybe daily, weekly, or monthly. If your paperwork builds up,items may go missing and the task becomes too daunting.

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File Systems

There are many purveyors of filing/paper storagesystems, 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!

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My System

Two plastic file foldersfrom the ContainerStore:

They are sturdy (moreso than paper files)

They are expandable

They are portable (andthey close)

I use two sizes so thatthe smaller receipts(taxi, gas, etc.) dont getmisplaced

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My Categories In the Large File:

Flex Spending to Submit (keepsome blank submissions formshere too)

Flex Spending Pending

Flex Spending Paid

Insurance to Submit (keepsome blank submissions formshere too)

Insurance Pending

Insurance Paid in Full

Insurance Tax Deductible

Practitioners (not submitted to

insurance) Supplements

Books/Therapeutic Toys &Tools

Other

In the Small File: Taxi

Gas

Tolls

Rental Cars

Grocery

Prescriptions

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Submitting to Insurance

If you think an expense may be covered by yourinsurance, submit it to your insurer first.

Submit claims separately, one claim per envelope.Claims are less likely to be lost if they arriveseparately (even if you mail several on one day). If

you submit too many in one envelope, it is morelikely that one will get misplaced or skipped.

Keep a copy of the claim form and providersbill/receipt. Even with information availableonline from many insurers, the online information

is no help if they lose your claim. A copy givesyou all the information you will need to resubmit,if necessary.

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Submitting to Insurance (contd)

Staple your copy of the claim form and receipttogether and note at the top the date you submit itto your insurer and the method you used to send it(e.g., Fax 1/1/10 USPS 2/2/10) this alsohelps if you need to follow up with your insurer.

File these documents in an Insurance Pendingfile.

If your doctor files claims from his or her office or

if you file electronically, keep a record of visitsand follow up on whether your claims have beenprocessed.

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Unreimbursed Amounts and

Employer Plans When you receive your explanation of benefits

(EOB) from the insurer, staple the EOB to theclaims form and receipt (I like to staple it on top

so I know I have heard back from my insurer onthat claim).

If the claim has been paid in full, move the packetto your Insurance Paid file.

If not, and if you have a Flex Spending plan,consider submitting anything not paid byinsurance to Flex Spending.

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Unreimbursed Amounts and

Employer Plans (contd) If you submit the remainder of a claim to Flex

Spending, attach your Flex Spending form to theEOB/claims form/receipt and note the date yousubmit it and the method you used to submit it.

Move the whole thing to your Flex Spending Pendingfile.

If Flex Spending pays the remainder in full, keep thedocumentation, along with your paperwork receivedfrom Flex Spending in your Flex Spending Paid file

you dont want to commingle Flex Spending paperworkwith your tax receipts if Flex Spending paid everythingon a particular claim.

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Potentially Deductible Amounts

If Flex Spending did not pay everything on a

claim, or if you do not have Flex Spending

Benefits or have exhausted them for the year:

Your stapled documents for this claim can now goto the Insurance Tax Deductible file.

You might want to note on the packet the amount

that is now potentially tax deductible after

insurance and/or Flex Spending reimbursement.

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Reading an EOB

You need to familiarize yourself with your insurers EOB to determinewhat your deduction is on a given claim.

Your deduction is based on what remains after the charge is reducedbased on any agreement your provider may have with the insurer andafter your insurer pays its share.

Your deductible amounts may include:

not covered amounts (to the extent these do not represent feereductions)

Co-pays

Deductibles

Co-insurance (for example, if you have a 70/30 plan your 30% share ofthe allowed charge is a deductible amount)

You also need to know the amount of your out of pocket costs (co-pay,co-insurance, and disallowed amounts) were paid by Flex Spending.

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The ProviderCharge

Any remaining amount on your annual

deductible that you had to pay on a claim

Co-Pays areMedical Expenses

If you are responsible for

this amount, it is deductible

If this is less than 100% you can

calculate a further deduction here

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Other Documentation and Helpful Hints

Use your Flex Spending dollars wisely. Expenses not covered byinsurance and not tax deductible 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.

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Other Documentation (contd)

If you use your car in connection with medicalexpenses and will take the standard medicalmileage rate deduction, you should keep a mileagelog (you can even keep it in the car to be sure tohave it when you need it).

You can use a calendar or log book to reconcilereceipts (especially for transportation-relatedreceipts that do not look medical on their face)to the dates on which you received medical care .

File receipts promptly in the appropriate file sothat they are ready for organizing at tax time.

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Other Documentation (contd)

Try not to pay medical expenses with cash credit cards

and checks are easier to substantiate.

Credit card monthly statements. I keep each cards

statements in a separate file. At tax time I take them out andmake 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.

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Transportation Receipts Taxis

Save items such as taxi receipts for travel to/fromappointments.

Paying with a credit card creates another checkfor the purpose of a ride, you can reconcile your

statement with your calendar.

Even though individually these receipts areusually de minimis expenses, if this is yourprimary mode of transportation with your specialneeds child to school/appointments, the totaldollar amounts spent will be significant and it maybe a good idea, in case of audit, to be able tosubstantiate these amounts.

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Transportation Receipts - Cars

Per the IRS, you can deduct the larger of

either 24 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.

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Planes, Trains, and Automobiles

Out of Town Medical Travel Expenses

The cost of travel is deductible if you travel to anothercity for medical care. The medical care must be the

primary purpose of your trip. A parents travel expensesare deductible when the parent is traveling with a child inneed of medical care.

Lodging (at $50 per person per night) also is deductiblewhen traveling out of town for medical treatment.

Meals are not deductible (except for the patient in ahospital or similar facility).

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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).

For each category of expenses, organize thedocuments 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).

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Create Your Own Spreadsheet

Create a document (in a word processing or spreadsheetprogram with which you are comfortable) that allows you totrack the expenses by category or groups of categories. Myown categories are based on my file headings, which makesit easy to transfer information. Even a table in a word

processing program can add a column of numbers (formulafunction).

You can use the same document and save it as a new versioneach year and simply adapt it to any changing needs noneed to reinvent the wheel.

This document will help you and your tax preparer prepareyour return more efficiently.

If you use Quicken or similar programs, the program mayhelp you organize this information.

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My child is on a special diet, what

can I deduct?

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.

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Special Diets (contd)

You may be able to use a website like

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.

www.tacanow.org has a handy template on theirwebsite.

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Special Diets Math

Flours are a great example of the math involved...

most regular flour comes in a 5 lb bag but many special flours(rice, garbanzo, nut) are sold in smaller sizes.

To make the example easy, if a 5 lb bag of flour is $5, it is $1 apound.

If the 2 lb bag of rice flour is $8, it is $4 a pound.

The per pound difference is $3, which you multiply by 2 (toaccount for your two lb bag of rice flour) for a deductibledifference of $6 a bag, which then will be multiplied by the

number of units you purchased throughout the year.

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After You Have Filed

I keep copies of everything sent to our

professional tax preparer. After our taxes are

filed, I move all my tax documentation

(medical and other) to a file box, containingfile folders labeled with the tax year and my

various categories of receipts and other

documentation (e.g.: 2009

Prescriptions).

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Disclaimer

The information contained herein and provided at the March3, 2010 presentation is for informational purposes only anddoes not substitute for tax advice from your own tax adviser,familiar with your financial information. NAA-NY Metro

and tonights presenters makes no warranties, express orimplied, as to the accuracy of information presented tonightand in this handout. As always, official sources andpublications and your own tax professional should beconsulted for the most current rules and regulations that maybe applicable to you.