Tax Tips for Special Needs Families

April 15th is not that far away, and that means tax time. Some people with special needs may be required to file an income tax return based upon their earned and unearned income. In addition, beneficiaries and trustees of a special needs trust may also be required to file an income tax return. If you or a loved one are required to file an income tax return, there are several tax tips listed below that hopefully will save you time and money.

Not All Income Is Taxable       
Supplemental Security Income (SSI) benefits may not be considered taxable income. If a beneficiary only receives Social Security Disability Insurance (SSDI) payments, and no other income from any other source, then SSDI benefits may not be considered taxable income. In addition, funds paid through a qualified dependent care assistance program also may not be considered as taxable income. However, there may be restrictions.

Special Deductions for People with Disabilities Are Available          
In some cases, individuals who have visual impairment may qualify for a higher standard tax deduction than the average taxpayer, depending on their level of impairment. Also, individuals with disabilities who itemize their deductions on their income tax return may be able to take advantage of deductions for medical expenses, special telephones, wheelchairs, motorized scooters, the cost of schools that provide special education services, and premiums for long-term care insurance. People with disabilities who require special goods or services in order to work may also be entitled to deduct certain expenses, such as business expenses.

Tax Credits Can Help People with Disabilities and Their Relatives   
There are several types of tax credits that apply to people with special needs. If you care for a child or a dependent person with disabilities, you may qualify for a child or dependent care tax credit for up to thirty-five (35%) percent of your expenses related to their care. Also, parents of a child with disabilities may also be able to claim an Earned Income Tax Credit, depending on the family’s income.

Special Needs Trusts Have Special Rules
The trustee of a special needs trust may find it difficult and challenging to file an income tax return for the trust. As a very general rule, income generated by a first-party special needs trust is typically considered to be taxable income attributable to the trust beneficiary [regardless of whether the income is actually distributed from the trust].

However, a third-party special needs trust established by a friend or relative for a person with special needs may generate taxable income for the grantor of the trust, the beneficiary of the trust, the trust itself, or all three at once, depending on the circumstances. In some cases, trustees may be required to file income tax returns for the special needs trust itself.

Hopefully, these few tax tips have been beneficial. As with most tax matters involving the area of special needs, please make sure you consult with a qualified certified public accountant or CPA who is familiar with the areas of special needs.

According to a recent survey, many parents with special needs children have not secured their child’s financial future. Statistically, 66% of parents do not expect their child with special needs to be financially independent, and 68% of parents with special needs children do not have a will.  Estate planning is essential for parents with special needs children. Outlined below are five simple steps that will help you plan for your child’s future:

  1. Children with special needs should not be a “direct beneficiary” of a will or trust [they may be disqualified from receiving federal and state aid].
  2. A special needs trust should be established in order to make sure that certain designated money or property will be used for your child’s best interest.  
  3. In many cases, a legal guardian should be appointed for any special needs child that turns 18 years old. Once a child turns 18 years old, they are considered an adult.
  4. A special needs trust should be established in order to protect your child’s eligibility for state and federal aid. 
  5. With proper planning, a life insurance policy can ensure your child will be financially secure. A gift of money or property to a child with special needs should go directly to that child’s special needs trust. If a child with special needs is the direct beneficiary of any type of money or property, they may become ineligible for state or federal benefits.

With proper estate planning, you can secure your child’s future. For more information on special needs trusts, please contact us.