Tax Benefits and Deductions for Families of Children with Disabilities

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Understanding How to Maximize Financial Support Through the Tax System

Caring for a child with disabilities presents unique challenges, not only emotionally and physically but also financially. Fortunately, the U.S. tax system offers a variety of benefits and deductions designed to help families offset some of these costs. Knowing which credits and deductions are available can make a significant difference in your annual tax bill and provide much-needed relief.

*The content of this article is for information purposes only and should be used as discussion points with your Tax or Legal Professional.

Key Tax Planning Considerations for Families

• • Child and Dependent Care Credit: If you pay for care so you can work or look for work, you may qualify for this credit. It covers a portion of expenses related to daycare, after-school programs, or specialized care for children with disabilities.
  • Medical Expense Deduction: You can deduct unreimbursed medical expenses that exceed 7.5% of your adjusted gross income. This includes costs for therapies, equipment, transportation to medical appointments, and modifications to your home or vehicle.
  • Earned Income Tax Credit (EITC): Families with low to moderate incomes may qualify for the EITC, which provides a refundable credit. Having a child with disabilities does not affect eligibility, but it may increase the amount you receive.
  • ABLE Accounts: The Achieving a Better Life Experience (ABLE) Act allows families to set aside funds in tax-advantaged savings accounts for disability-related expenses without affecting eligibility for government benefits. $2000/VA State Tax Deduction, varies by state​
  • Tax Credit For the Elderly & Disabled: You can qualify for this deduction if you’re at least 65 years old or if you are “permanently and totally disabled.” The disability criteria require having a doctor state that you are unable to do any substantial gainful activity because of a mental or physical health condition. You can qualify if you’re on SSI or SSDI, but there are restrictive income limits. Anyone on SSDI probably receives too much and many SSI or VA disability benefit recipients will also be ineligible
  • Deductions for Home Improvement Modification: Home improvements for disability, such as installing ramps, widening doorways, lowering cabinets, or adding grab bars, are tax-deductible as medical expenses if they are necessary for the care of you, your spouse, or dependents. The deduction is the cost minus any increase in home value. These costs must exceed 7.5% of your AGI.
  • Impairment-Related Work Expense​: An item or service needed because of physical or intellectual impairment (adaptive equipment, caretaker). An item or service that enables you to work (home computer, accessible vehicle). A business expenses paid that is unreimbursed by another source such as Medicare, Medicaid or private insurance (mileage to and from work)​.
  • Taxation of Attendant Income for Parents/Siblings​: Income is not Federally Taxed​. Social Security/FICA still applies if EOR is not in household​.
  • Having a Lodging Agreement​ of Disabled Young Adult: In kind support such as paying for housing when your child receives SSI will reduce the SSI income by 1/3.  To protect your child’s income and maximize benefits you need to charge them “rent.”  This is the fair market value or 1/3rd the cost of Shelter. Use this money strategically, if possible, to better fund a SNT with life insurance or other investments.​

Secure Act Eliminates the Strech IRA

The passage of the SECURE Act brought significant changes to how inherited retirement accounts are handled, most notably eliminating what was commonly known as the “Stretch IRA” for most beneficiaries. Under the new rules, inherited IRAs generally must be fully distributed within ten years, accelerating taxation and potentially pushing beneficiaries into higher tax brackets during that period. However, families planning for a loved one with disabilities have an important exception to consider. When properly structured, a Special Needs Trust named as beneficiary of an IRA for a disabled individual may still qualify to stretch required minimum distributions over the individual’s lifetime. This can create a meaningful tax advantage by spreading income out over many years instead of compressing it into a single decade. That said, careful planning is essential. While distributions passed through to the beneficiary are taxed at the individual’s rate, any income retained inside the trust is taxed at trust tax rates, which reach the highest brackets much more quickly. Coordinating beneficiary designations, trust language, and overall tax strategy is critical to ensure the plan

Tips for Maximizing Benefits

1. 1. Keep detailed records of all expenses related to your child’s care and support.
   2. Consult with a tax professional who is familiar with disability-related deductions.
   3. Explore state and local tax benefits, which may supplement federal programs.

Understanding and claiming every available tax benefit can help families manage the additional costs associated with raising children with disabilities. By staying informed and organized, you can ensure that you receive the financial support you deserve and make the most of the tax system’s resources.

This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.