Tax Strategies for Parents of Kids with Special Needs – TCJA of 2017
The original article on this topic has been of great assistance to many parents. This update will discuss what has changed under the Tax Cuts and Jobs Act (TCJA) of 2017. As with the original article, all information presented in this article is educational in nature and is not to be considered tax advice. Please contact a qualified tax professional to discuss how these concepts may or may not apply to your personal situation.
Summary of TCJA as it relates to Families
In addition to the changes in tax rates and brackets, the most significant changes affecting families are:
1) Increased Standard Deduction and changes to Itemized Deductions
2) Elimination of Personal Exemptions
3) Expanded Child Tax Credit
4) New Dependent Credit
Fewer families will itemize (file Federal Schedule A) because the standard deduction has increased: $12,000 for Single, $18,000 for Head of Household, and $24,000 for Married Filing Jointly. In addition, many deductions allowed in prior years have been either limited or eliminated. The deduction for state and local taxes, i.e. income, property, DMV fees, etc., is capped at $10,000. Casualty losses are restricted to Federally Declared Disaster Areas. Miscellaneous Itemized Deductions are no longer allowed, this category included things such as safety deposit box fees, tax preparation fees, investment advice, uniforms, union dues, job search costs, etc. For the 2018 tax year, the AGI (Adjusted Gross Income) floor for Medical Deductions remains at 7.5%.
However, because California has not conformed to any of the changes to Itemized Deductions, I expect that many California families will be taking the Standard Deduction for Federal and Itemizing for State tax purposes. Families outside of California should look at their State’s income tax agency’s website to check if their State has conformed or not. This means that the record keeping required for tax purposes has not changed.
Personal Exemptions have been eliminated. However, you will still need to identify your dependents on your return to claim such benefits as Head of Household status, Child Tax Credit, Earned Income Tax Credit or Educational Credits.
The Child Tax Credit has been increased and expanded. The credit is now $2,000 per child. Of the $2,000, $1,400 is refundable, meaning it will be paid even if no tax liability exists. Almost all families will now qualify, as this credit does not begin to phase out until AGI exceeds $400,000 for a married couple and $200,000 for all others. For the purpose of this credit, the age limit for a qualifying child is under age 17 at the end of the tax year.
There is a new $500 credit for dependents over age 17. To qualify the dependent must have gross income less than $4,150 and meet all the other requirements to be claimed as a dependent. This category would include household members who are permanently disabled.
There are no changes to the definitions of what qualifies as a medical deduction as discussed in my December 2013 article. The medical mileage rate is $0.18 for both 2018 and 2019. The AGI floor for medical expenses is 7.5% for 2018. As the law currently stands, the floor will increase to 10% for 2019. There are bills in Congress that propose keeping the 7.5% limit, but there is no guarantee that they will pass.
California will keep the 7.5% floor for 2019.
Many people ask me about medical use of Cannabis. Unfortunately, because the Federal Government still considers this a controlled substance, it is not a deductible medical expense for either Federal or California purposes. California law as it relates to medical expenses conforms to Federal law. Consequently, while the use of medical Cannabis is legal in California, the deduction is not allowed.
The IRS now considers obesity a disease, therefore, any amounts paid for participation in a weight loss program are deductible as medical care if you were directed to by a physician.
For all medical deductions, you must maintain appropriate receipts for payment.
SSDI and SSI
Both programs provide monthly income to disabled persons. The similarities end there.
SSDI – Social Security Disability Income. This is benefit program that one qualifies for based upon age and work credits. Work credits means that you are insured under FICA, that you paid in FICA taxes during the quarters when you were employed. For tax purposes, it is not distinguishable from regular Social Security Income and is includable in gross income. A Taxpayer attempted to exclude these benefits as “Disability” income under IRC 104(a). The Tax Court disagreed (Palsgaard and Kelly v. Comm, TCM 2018-82).
SSI – Supplemental Security Income is a means tested program. You do not have to have earned work credits. For tax purposes, this is not taxable to the recipient because it meets the definition of the General Welfare Exception (GWE). GWE payments must be made from a government fund, be based on individual or family need, and not be a payment for services.
However, if a family member is contributing SSI or SSDI payments to cover their share of household expenses, such payments may be taxable income to other family members or may affect the ability to claim Head of Household status. If you have any concerns over how SSI income is to be treated, I urge you to contact a qualified tax professional.
529 Plans and ABLE Accounts
TCJA allows parents to use up to $10,000 tax free distributions from a 529 plan for elementary or secondary education in a private school setting (k-12). The $10,000 is per student not per 529 account and it may be used for tuition only.
Distributions from 529 accounts for postsecondary education (college or vocational) can be used for education related expenses in addition to tuition, such as:
- Computers, peripheral equipment, software
- Internet access
- Special needs services in connection with enrollment or attendance
- Fees, books, supplies and equipment required for attendance.
California does not conform to the use of 529 funds for K-12 but does conform to all postsecondary uses.
Any distribution from 529 account is first applied to principal then to earnings. Also, if a student drops a class and receives a tuition refund, the redeposit of that tuition into a 529 plan is considered a recontribution of principal, even if the original distribution had included earnings. California does conform to this change.
Funds in a 529 account may be rolled over into an ABLE account tax-free for Federal tax purposes. The annual limit of such a rollover is $15,000 for 2018 and 2019. California does not conform to this change, and any earnings included in the rollover will be subject to a 2.5% penalty and includable in taxable income.