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Tax Tips for Families with Special Needs Children

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Parents of a special needs child face many challenges, not the least of which is the high costs of providing care. Unfortunately, many are unaware that they may be eligible for several tax benefits that can offset some of those expenses. This can result in hundreds, if not thousands of dollars in tax savings. The following are a few key benefits:

  • School Expenses – Ordinarily costs related to providing for a child’s education are not deductible. Not so, however, with special needs children. The unreimbursed cost of attending a “special school” for a neurologically or physically handicapped individual is deductible as a medical expense.  The only stipulation is that the principal reason for enrolling in that school must be to alleviate the handicap through the school’s resources. The deductible expenses associated with the special school include amounts paid for lodging, meals, transportation, as well as the cost of ordinary education that is incidental to the special services the school provides.

 

  • Conferences and Seminars- Parents and guardians of special needs children often attend medical conferences and seminars to educate themselves about their child’s disability. Provided the conference deals specifically with the child’s medical condition, the cost of the conference is deductible as a medical expense.

 

  • Earned Income Tax Credit- The earned income tax credit, a credit designed to encourage the economically disadvantaged to work. It can amount to as much as $6,044 in 2013. The amount of this credit rises incrementally with the number of children one claims. Normally there is an age limit to qualify for this credit, but not for severely disabled children. They can be claimed as “qualified children” even into adulthood.

Payroll Cards Under Investigation by N.Y. Attorney General

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If your company uses payroll cards to compensate its employees, watch out. New York Attorney General Eric Schneiderman has launched an investigation into companies that pay hourly employees by depositing payroll onto pre-paid cards. Why the concern? Payroll cards, like debit cards, typically have fees associated with inquiries, card replacement, ATM withdrawals, or inactivity. Schneiderman’s concern is that the fees associated with these cards may be insufficiently disclosed or excessive and that the fees reduce employees’ take home pay. Payroll cards can raise a host of legal issues for the employer as well. For example, federal law prohibits mandatory use of the cards as a condition of employment. It has been reported that many employees have been forced to accept the card. It would be highly advisable for employers to seek competent counsel to ensure their compliance before it’s too late.

 

Are you in Business or is it Just a Hobby?

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Whether an activity is classified as a business or a hobby can make a significant difference when it comes to taxes. Hobby losses are subject to “hobby loss rules”, under which the deductible expenses are limited to the amount of income generated by the activity. Even the expenses that can be deducted are subject to a 2% of adjusted gross income (AGI) floor. Deductions from business activity income, however, may exceed income and are fully deductible.

 To illustrate, let’s suppose John, a photographer, decided to start a side business, taking pictures at weekend weddings. He earned $4,000 and incurred travel expenses of $3,000 and supply expenses of $2,000. If John’s side job is classified as a business activity he may deduct both expenses to arrive at a $1,000 loss. If it’s classified as a hobby, however, he may only deduct expenses to the extent of his earnings $4,000(assuming those expenses exceed the 2% of AGI floor), and no loss would be allowed. 

While the difference is clear in terms of the tax ramifications, whether or not to classify an activity as a hobby is a rather complex matter.

For an activity to be considered a business, it must be engaged in for profit. How will the IRS determine the intent of the business owner? Here are several factors they consider:

  • How the activity is handled – To be considered a business an activity must be conducted in a businesslike manner. The taxpayer can establish this by maintaining separate personal and business bank accounts, and keeping records and books, maintaining a website

 

  • Historic performance- A long streak of losses indicates a hobby, whereas sustained earnings indicate a for-profit activity

 

  • Nature of the activity- If the activity can provide some sort of recreation or other personal motive, it points to hobby status. If, however, there is no conceivable personal motive it points to business activity

 

These are only a few of many factors the IRS may consider. We recommend that you consult with a tax professional to determine the proper classification of your business activity.

IRS Offers New Simplified Option for ‘Office in the Home’ Deduction

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Beginning 2013, the Internal Revenue Service is offering a simplified method that many owners of home-based businesses and some home-based workers may use to figure their deductions for the business use of their homes.

The new optional deduction is capped at $1,500 per year based upon $5 a square foot for up to 300 square feet. This will serve to reduce the paperwork and recordkeeping burden on small businesses.

While the new safe-harbor may be more convenient, in many cases the traditional ‘office in the home’ deduction would yield a greater tax savings. Between mortgage interest, real estate tax and utilities, many taxpayers exceed the $1,500 cap of the new deduction. The new deduction also has the disadvantage that if it would result in a loss it cannot be taken. This is in contrast to a regular office in the home deduction, which can result in a loss carry-forward. The new deduction also cannot be combined with a loss that is carried forward from the previous year.  

Supreme Court Decision Impacts Same-Sex Couples

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The Supreme Court’s ruling that a key component of the Defense of Marriage Act (DOMA) is unconstitutional was perceived by most as a victory for same-sex couples. The Court decided to leave the definition of a “marriage” to the States, 12 of which currently permit same-sex marriages. Same-sex couples living in one of those states will now be entitled to the same federal benefits as traditional couples. The 12 states include NY and all of the New England states, MD and DE. This has many far-reaching implications, including:

  • Medical insurance coverage will become more affordable, as they will now be recognized as a married couple. Employers must offer insurance to same-sex spouses of employees in the 12 states.

 

  •  They will be able to file jointly on their federal tax returns to ensure tax savings, and will be able to amend prior year tax returns (most likely as far back as 3 years).

 

  • Federal benefits, such as Social Security, military and veteran benefits, pension and health benefits for federal employees will be available.  

 

  • The federal gift and estate tax marital deduction will be available to same sex married couples. As a result, they will be able to transfer assets between one another without payment of a transfer tax. This also means they can amend prior year estate tax returns to claim refunds previously disallowed due to DOMA.

 

 Sounds like cause for celebration, right? Welcome to married life. While the ruling is clearly a victory for equality, it actually has a negative tax implication for many same-sex couples. They will now be subject to the “marriage penalty,” a penalty that has become more significant due to several recent changes in tax law. Under the Patient Protection and Affordable Care Act (“Obamacare”), for example, an additional 0.9% Medicare tax on wages and self-employment income, as well as a 3.8% tax on investment income will be imposed. While the threshold is $200,000 for a single taxpayer, married taxpayers only get a $250,000 threshold. As a result of this ruling, many married same-sex couples that would have previously avoided the new tax by filing their federal income tax returns separately will now have to pay the tax.

All this is just the beginning. With over 1,000 federal rules and regulations that need rewriting, aside from tax, time will tell just how far reaching the implications will be.

 

US Estate Tax: When Filing is Optional but Advisable

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Your beloved spouse has passed away.  The last thing you need is extra paperwork.  But…sometimes completing an extra form can mean the difference in literally millions – $5.25 million to be exact – able to be passed  free of federal estate taxes upon your death to your loved ones.

Completing a US Form 706 (US Gross Estate Tax Return) allows a decedent who is married and does not fully use his $5,250,000 exemption, to pass his unused exemption (“Decease Spousal Unused Exclusion or DSUE”) to his spouse. This is known as portability.

What does this mean in practical terms?