Individuals with disabilities, as well as parents of disabled children, are eligible for several income tax benefits. This article explains some of these tax breaks.
ABLE Accounts – A federal law allows states to offer specially designed, tax-favored ABLE accounts to people with disabilities. Qualified ABLE programs provide the means for individuals and families to contribute and save to support individuals who became blind or severely disabled before turning age 26 in maintaining their health, independence, and quality of life.
The states run the ABLE programs authorized by the federal tax statute. A state that has established an ABLE account program can offer its residents the option of setting up one of these accounts or contracts with another state that offers ABLE accounts. Contributions totaling up to the annual gift tax exclusion amount, currently $16,000, can be made to an ABLE account each year, and distributions are tax-free if used to pay qualified disability expenses.
Through 2025, a tax provision allows the beneficiary of the ABLE account (i.e., the disabled person) to contribute a maximum additional amount each year, equal to the lesser of:
• The beneficiary’s taxable compensation for the year, or
• The prior year’s inflation-adjusted poverty level (so using the 2021 poverty level amounts for a one-person household, the 2022 ABLE beneficiary’s contribution could be up to $12,880. The equivalent amount for residents of Hawaii is $14,820 and $16,090 for Alaska.
However, the extra contribution isn’t allowed if the beneficiary’s employer contributes to a qualified retirement plan on the beneficiary’s behalf.
The beneficiary’s additional contribution qualifies for the non-refundable saver’s tax credit, which, depending on the beneficiary’s actual income, can be 10%, 20%, or even as much as 50% of up to the first $2,000 contributed, for a maximum credit of $1,000.
Disabled Spouse or Dependent Care Credit – A tax credit is available to individuals who incur childcare expenses for children under the age of 13 at the time the care is provided. This credit is also available for the care of the taxpayer’s spouse or of a dependent of any age who is physically or mentally unable to care for himself or herself and lived with the taxpayer for more than half the year. This is also true for individuals who would have been dependents except for the fact that they earned $4,400 or more (2022) or filed a joint return with their spouse. The credit ranges from 20% to 35%, with lower-income taxpayers benefiting from the higher percentage and those with an adjusted gross income of $43,000 or more receiving only 20%. The care expenses qualifying for the credit are limited to $3,000 for one and $6,000 for two or more qualifying individuals. Note that for 2021 only, the credit rate and care expenses allowed were significantly higher and the credit was refundable.
Medical Expense Deductions – In addition to the “normal” medical expenses, individuals with disabilities can incur other unusual deductible expenses. However, to gain a tax benefit, an eligible taxpayer must itemize his or her deductions on Schedule A, and the taxpayer’s total medical expenses must exceed 7.5% of their adjusted gross income. Eligible expenses include:
- Vision Aids – Contact lenses and eyeglasses
- Hearing Aids – Including the costs and repair of special telephone equipment for people who are deaf or hard of hearing
- Wheelchair – Costs and maintenance
- Service Dog – Costs and care of a guide dog or service animal. The IRS has stated that “the costs of buying, training, and maintaining a service animal to assist an individual with mental disabilities may qualify as medical care if the taxpayer can establish that the taxpayer is using the service animal primarily for medical care to alleviate a mental defect or illness and that the taxpayer would not have paid the expenses but for the disease or illness.”
- Transportation – Modifications or special equipment added to vehicles to accommodate a disability
- Impairment-Related Capital Expenses – Amounts paid for special equipment installed in the home or for improvements may be included as medical expenses, if their main purpose is medical care for the taxpayer, the spouse, or a dependent. The costs of permanent improvements that increase the property’s value may be partly included as a medical expense. The costs of the improvement are reduced by the increase in the property’s value. The difference is a medical expense.
If the improvement does not increase the property’s value, the entire cost is included as a medical expense. Certain improvements made to accommodate a home to a taxpayer’s disabled condition, or to that of the spouse or dependents who live with the taxpayer, do not usually increase the home’s value, so the costs can be included in full as medical expenses. A few examples of full-cost medical expenses include constructing entrance or exit ramps for the home; widening entrance and exit doorways, hallways, and interior doorways; installing railings, support bars, or other modifications; and adding handrails or grab bars.
- Learning Disability – Tuition fees paid to a special school for a child who has severe learning disabilities caused by mental or physical impairments, including nervous system disorders, can be included as medical expenses. A doctor must recommend that the child attend the school. Fees for tutoring from a teacher who is specially trained and qualified to work with children with severe learning disabilities may also be included if the tutoring is recommended by a doctor.
- Special Schooling – Medical care includes the costs of attending a special school designed to compensate for or overcome a physical handicap to qualify the individual for future normal education or for normal living. This includes a school that teaches braille or lip reading. The principal reason for attending the school must be its special resources for alleviating the student’s handicap. The tuition for ordinary education that is incidental to the special services provided at the school, as well as the costs of meals and lodging supplied by the school, are also included as medical expenses.
- Nursing Services – Wages and other amounts paid for nursing services can be included as medical expenses. Services need not be performed by a nurse if the services are of a kind generally performed by a nurse. This includes services connected with caring for the patient’s condition, such as giving medication, changing dressings, and bathing and grooming the patient. These services can be provided in the home or another care facility. Generally, only the amount spent for nursing services is a medical expense. If the attendant also provides personal and household services, these amounts must be divided between the time spent performing household and personal services and the time spent on nursing services.
- Impairment-related Work Expenses – An employed individual with physical or mental disabilities may claim a deduction for impairment-related work expenses for attendant care at the individual’s place of employment or for other expenses at the job location that enable the individual to work. Those with a physical or mental disability that limits their being employed, or substantially limits one or more major life activities, such as performing manual tasks, walking, speaking, breathing, learning, and working are eligible to deduct their impairment-related work expenses if they itemize deductions. These expenses are claimed as a miscellaneous itemized deduction on Schedule A, not as a medical expense.
If you have questions about any of the disability-related tax benefits discussed in this article, or if you have questions concerning potential medical expenses not discussed above, please give this office a call.