Make The Most Of Tax Planning

By Rob Wrubel, CFP^®

We are in the heart of tax season. Most of us received our W-2s in early February. Families with investment accounts and funded trusts recently received 1099s for those accounts. Tax preparers and CPAs are shut away for the next month hoping the phone doesn’t ring and the days have extra hours so they can finish the flood of returns on their desks in time.

Taxes are like so many other aspects of a life with a special needs family member—so much is the same, so much is different. Families with a special needs member must pay extra attention at this time of year to make sure they use the tax code to their benefit as much as possible.

What should you do to help you the most during this tax season? Here are a few tips and tax ideas. We are not accountants at Cascade Investment Group so check with your preparer this tax season. The following ideas are not meant to be comprehensive; we seek to offer some suggestions:

Supplemental Security Income (SSI) benefits are not taxable.

Disability income benefits in plans paid for by your employer are considered taxable income. Generally, if you have disability income insurance and you paid the premiums with taxable dollars the income received is not taxable.

You may be able to deduct medical expenses. You can deduct your amount of medical and dental expenses that is more than 7.5% of your adjusted gross income. Benefits paid through a pre-tax plan through your employer are not deductible—only the expenses you paid for with income you received.

For instance, assume you have an AGI of $75,000. Your medical expenses for the year add up to $10,000. 7.5% of $75,000 equals $5,625. You can deduct $4,375 ($10,000 less $5,625).

The medical expense deduction is the most common one missed by families with special needs members. We often have higher than average medical expenses and may have expenses not covered by insurance plans or Medicaid. Many families pay for additional therapies, dental work and home modifications that no other source will cover.

The medical expense deduction can be used for a wide variety of areas typically not reimbursed. The IRS publication includes the following as examples: contact lenses, glasses, special telephone equipment, Braille books, guide dog expenses, special school costs, certain home improvements and more.

The 7.5% of AGI limitation does not apply if you take some of these expenses, or others, as impairment related work expenses. If you need certain items to be able to stay employed, you can likely apply them as work related expenses. These items must be proven to help you or your family member to do your work satisfactorily, are only used incidentally in your personal life and are not covered by other income tax laws.

There are a few tax credits available. There is a credit up to 35% of related expenses necessary to pay someone else for the care of a child or dependent. There is also a credit for those retired and disabled and an earned income credit. Speak with your tax preparer for more information about these.

The tax code potentially provides business incentives. Businesses that remove barriers to make their facilities or vehicles more accessible to the elderly or disabled may qualify for certain credits. There are credits available for businesses that hire people with disabilities as well.

As with most elements of special needs planning, check to make sure the tax professional you hire understands the issues you face. Ask them if they have experience working with families with a disabled member. How many? What tax issues do they see as being common? Where do they think they can help you?

Many advisors—tax preparers, attorneys, investment professionals—do not have experience working with families like yours. They often miss important planning opportunities or create potentially significant issues due to this lack of knowledge, experience or both.

Inexperienced or untrained accounting professionals sometimes make recommendations that conflict with your desire to maintain and protect available government benefits. It may make sense from a tax perspective to recommend an IRA contribution for your adult special needs family member. Unfortunately, funding an IRA with $4,000 also puts that person above the $2,000 resource cap to be eligible for SSI. That could cause an interruption or loss of benefits.

Few people enjoy the time, effort and cost to prepare taxes. Use your tax time wisely to find the most benefit for your family.

Call us with any help you need in funding retirement accounts, trust asset management or other financial and investment issues related to special needs.

March 22, 2010