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.

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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.
!  Lodging and Travel Expenses to receive
medical care in another city may be deductible
within certain limits. See Pub. 502 at pp. 10,
14.
15
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.
!  Books to help parents understand and help their special
needs child should be deductible along the same lines as
conferences. See Pub. 502 at p. 11.
!  Food for Special Diets: Tax courts have allowed the cost of
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.
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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.
!  Autism service dogs may be deductible as a medical expense if the dog
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.
!  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).

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 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.
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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.
!  Even though we are focusing tonight on deductible
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
 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:
!  theContainer 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:

!  In the Small File:
!  Flex to Submit (keep some
blank submissions forms here !  Taxi
too) !  Gas
!  Flex Spending Pending
!  Tolls
!  Flex Spending Paid
!  Insurance to Submit (keep some !  Rental Cars
blank claim forms here too) !  Grocery
!  Insurance Pending !  Prescriptions
!  Insurance Paid
!  Practitioners (not submitted to
insurance)
!  Supplements
!  Labs
!  Books/Therapeutic Toys &
Tools
!  Other

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).
!  If it has been paid in full, move the packet to your
Insurance Paid file.
!  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 If you are responsible for this

Charge 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.
!  You can use a calendar or log book to reconcile receipts
(especially for transportation-related receipts that do not
look medical on their face) to the dates on which you
received medical care .
!  File receipts promptly in the appropriate file so that they
are ready for organizing at tax time.
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).
"  For
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).

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 regular flour comes in a 5 lb bag but many special
flours (rice, garbanzo, nut) are sold in smaller sizes.
!  Tomake the example easy, if a 5 lb bag of flour is $5, it is
$1 a pound.
!  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
(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
 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.

55