Tax Tips for Parents of a Child with Special Needs

Do you have a child with a disability? If so, there may be income tax deductions, exemptions or credits available to you. Some of the available income tax benefits are unfamiliar even to tax preparers, and some of the favorable treatment options are available to people who provide care for other family members, as well.

Deducting your child as a dependent

If your child is a minor and you provide at least half of his support, you can claim him as a dependent, which will give you a significant income tax exemption. Of course, there can be special concerns if your child has significant income himself, or if you are divorced and the deduction rules were negotiated as part of your divorce, or if your child does not live with you. Normally, though, the deduction for a minor child (whether he has special needs or not) is straightforward.

When your child reaches age 19, however, the rules change (for students, the rules change at age 24). You may still be able to deduct him as a dependent – provided that a few requirements are met. First, he must be permanently and totally disabled (if he is receiving Supplemental Security Income or Social Security Disability benefits he has been determined to be disabled).

Generally speaking, he must also live with you for at least half of the year (although there are a number of exceptions to that requirement), you must provide at least half of his support, and he cannot be claimed as a dependent on anyone else’s tax return.

These rules apply to your child, biological or adopted. They also apply to your stepchild, foster child, grandchild, brother, sister, niece, nephew or a descendent of any of those people.

There is actually another way your child can and certain other relatives may qualify as your dependent, and it does not require a finding of permanent and total disability. A “qualifying relative” can be a dependent even if he does not live with you (he has to be on a lengthy list of specific relatives, including children siblings, parents and many more), so long as you provide half of his support and he does not have income over $3,900 (in 2013 – this number will change each year).

The Internal Revenue Service has an excellent publication listing the finer details of claiming a child or other relative as a dependent. Look for Publication 501: Exemptions, Standard Deduction and Filing Information. It is updated annually.

What does it get you to claim a special needs child as a dependent? In 2013 that means you get a $3,900 reduction in your taxable income (this amount shrinks for higher-income taxpayers). The number will be higher in 2014, but there will be another issue to consider: if you claim your child as a dependent on the tax return you file next year (for 2014), you will also need to make sure he has qualifying health coverage under the Affordable Care Act. Of course, if he is on Medicare or Medicaid that requirement is easily met.

One other thing to keep in mind: if you do provide enough support for your adult child to claim him as a dependent, that might have some effect on his eligibility for other benefits. If, for instance, your child lives with you, that providing of food and shelter might reduce (or even eliminate) his Supplemental Security Income (SSI) payments. Some other kinds of support, however, might have no effect on SSI. It’s a complicated interrelationship, and you should talk with your special needs lawyer to figure out how the rules apply to you.