Tax Issues for Special

Needs Families

Mark L. Berger, CPA

&
Kim Mack Rosenberg

March 3, 2010
 The Autism Puzzle
• We know that autism and other illnesses present a
whole host of challenges to families.
• Among those are monetary challenges, which can
cause both financial and emotional strain.
 The Puzzle is Complex
Many of our children need significant,
specialized assistance and treatments, including,
among others:
• Therapies
• Medical specialists
• Private special needs schools
• Medications/supplements
• Special diets
• Assistive communication devices
• Specially-trained caregivers
 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.
 The Tax Puzzle
• We are here tonight to help with a few key
questions:
• Is any of this tax deductible?
• What are the limits on deductibility?
• I am drowning in paper … how do I document my
deductions and organize my paperwork?
Medical Expenses
See Pub. 502 at p. 3.
 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
pages 3-5 for the definition of who
qualifies as a dependent for medical
expense purposes
 Which Expenses Are Includable?
• The IRS provides an extensive list of
includable medical expenses at pages 5-
15 of Pub. 502.
• There also is a list of “not includable”
expenses in Pub. 502 at pages 15-17. 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.
 A Few Examples of
Includable Expenses:
• Acupuncture
• Chiropractor
• Lab Fees
• Long-Term Care

• We will discuss many

others tonight as well.
 7.5% Rule
Medical 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%)
 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 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 p. 16.
 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.
 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 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.
 Special Needs Deductions (cont’d)
• Conferences (like the NAA Hopeism
Conference 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 p. 11.
• Lodging and Travel Expenses to receive
medical care in another city may be deductible
within certain limits. See Pub. 502 pp. 10-11,
14.
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 page 14.
• Books to help parents understand and help their special
needs child should be deductible along the same lines as
conferences. See Pub. 502 pp. 11-12
• 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.
 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 p. 15.
 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 pp. 17-20.
This is particularly important for large deductions – such
as tuition at a special needs school – for which you may
be reimbursed in whole or in part in a different tax year.
 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 filing
that return.
• For example, if you filed your 2007 tax
return on April 10, 2008, you have until
April 10, 2011 to amend that return.
 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 expenses 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).
Recordkeeping
 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 dependant for medical deductions
counts and the co-pays and other expenses do add up.
 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, then 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!
 So you have a receipt from a
doctor or therapist . . . What now?

– Or –

You turned me into a pack rat – what do I

do with all of this stuff???
 Substantiating Your Deductions
Keep in mind what the IRS generally is looking for

Pub. 502 p. 20
 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.
 File Systems
• There are many purveyors of filing/paper storage
systems, 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!

 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 smaller receipts
(taxi, gas, etc.) don’t get
misplaced
 My Categories
• In the Large File: • In the Small File:
• Flex Spending to Submit (keep • Taxi
some blank submissions forms • Gas
here too) • Tolls
• Flex Spending Pending • Rental Cars
• Flex Spending Paid • Grocery
• Insurance to Submit (keep • Prescriptions
some blank submissions forms
here too)
• Insurance Pending
• Insurance Paid in Full
• Insurance – Tax Deductible
• Practitioners (not submitted to
insurance)
• Supplements
• Books/Therapeutic Toys &
Tools
• Other
 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.
• Keep a copy of the claim form and provider’s
bill/receipt. Even with information available
online from many insurers, the online information
is no help if they lose your claim. A copy gives
you all the information you will need to resubmit,
if necessary.
 Submitting to Insurance (cont’d)
• Staple your copy of the claim form and 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 also
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.
 Unreimbursed Amounts and
Employer Plans
• When you receive your explanation of benefits
(“EOB”) from the insurer, staple the EOB to the
claims form and receipt (I like to staple it on top
so I know I have heard back from my insurer on
that claim).
• If the claim 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.
 Unreimbursed Amounts and
Employer Plans (cont’d)
• If you submit the remainder of a claim to Flex
Spending, attach your Flex Spending form to the
EOB/claims 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 Spending Paid” file –
you don’t want to commingle Flex Spending paperwork
with your tax receipts if Flex Spending paid everything
on a particular claim.
 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 go
to 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.
 Reading an EOB
• You need to familiarize yourself with your insurer’s EOB to determine
what your deduction is on a given claim.
• Your deduction is 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)
• 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.
 If you are responsible for Any remaining amount on your annual
this amount, it is deductible deductible that you had to pay on a claim

The Provider Co-Pays are

Charge Medical Expenses

If this is less than 100% you can

calculate a further deduction here
Other Documentation and Helpful Hints
• Use your Flex Spending dollars wisely. Expenses not covered by
insurance 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.
 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).
• 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.
 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.
 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.
 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 may also be able to get a card from the MTA website
(www.mta.info) that keeps track of where the card is used.
• Your calendar or log can help track the dates and reconcile
receipts to medical appointments etc.
 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.
Maximizing Your Car Expense
Deduction
 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 expenses
are 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).
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).
 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. My
own categories are based on my file headings, which makes
it easy to transfer information. Even a table in a word
processing program can add a column of numbers (formula
function).
• 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.
• 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.
 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.
 Special Diets (cont’d)
• 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 their
website.
 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 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, which then will be multiplied by the
number of units you purchased throughout the year.
 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, containing
file folders labeled with the tax year and my
various categories of receipts and other
documentation (e.g.: “2009 –
Prescriptions”).
 Disclaimer

The information contained herein and provided at the March

3, 2010 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.