April 15th is right around the corner, which means that it is time to file yet another personal income tax return. Although some people with disabilities may not have enough income to necessitate an income tax filing, most people will need to file a return based on their earned and unearned income. Beneficiaries and trustees of special needs trusts may have additional filing requirements. If you or a loved one think that you need to file a return, here are several tax tips to keep in mind that could save you time and money.
Not All Income Is Taxable
Although the rules about taxable income can be complicated, several provisions affecting people with disabilities are easy to understand. First, Supplemental Security Income (SSI) benefits are not considered taxable income. Second, if a beneficiary receives only Social Security Disability Insurance payments (SSDI), and no other income from any other source, then those SSDI benefits are probably not taxable either. Third, funds paid through a qualified Dependent Care Assistance Program are not included as taxable income, up to certain limits. Finally, Veterans Administration disability benefits do not count as taxable income for the beneficiary.
Special Deductions for People with Disabilities Are Available
For starters, taxpayers who have visual impairments may qualify for a higher standard deduction than the average taxpayer, depending on their level of impairment. All other taxpayers with disabilities who itemize their deductions may be able to take advantage of deductions for medical expenses, including deductions for special telephones for people with hearing impairments, wheelchairs and motorized scooters, guide dogs or other animals that aid people with disabilities, the cost of some schools that provide special education services for relieving mental or physical disabilities, and premiums on long-term care insurance, up to certain amounts. People with disabilities who require special goods or services in order to work may also be able to deduct these expenses as business expenses, provided the good or service has not already been counted as a medical expense.
Tax Credits Can Help People with Disabilities and Their Relatives
Several types of tax credits apply to people with disabilities. If you care for a child or other dependent person with disabilities, you may qualify for a child and dependent care tax credit for up to 35 percent of your expenses related to his or her care. People under 65 who have retired with a permanent disability can also claim a special tax credit that is also available to the elderly. Many people with disabilities who work and who do not have children who qualify for an Earned Income Tax Credit may still qualify for the credit themselves. If they obtain a tax refund due to an Earned Income Tax Credit, the refund will not count against the taxpayer for purposes of determining SSI or Medicaid eligibility. 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
Tax season can be especially difficult for the trustees of special needs trusts because the tax rules for trusts vary greatly depending on the type of trust created. As a very general rule, income generated by a first-party special needs trust (a type of trust designed to hold a person with special needs' own funds) is typically considered to be taxable income attributable to the trust beneficiary, regardless of whether the income is actually distributed from the trust. On the other hand, 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. Furthermore, in certain situations, trustees have to file income tax returns for the special needs trust itself, and other, more complicated forms pertaining to distributed income may have to be prepared for the beneficiary.
Because tax time often creates more problems than solutions, it is best to consult with your qualified special needs planner about these complicated questions, even if you or your family are already working with a good accountant.
This material was prepared by the Academy of Special Needs Planners
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.