03 02 11 PNEM Presentation

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MARK L. BERGER, CPA &

KIM MACK ROSENBERG•

MARCH 2, 2011

Tax Issues for Special

Needs Families

1



• Like many other illnesses, autism presents a host of significant challenges to families.

• Among those are monetary challenges, which cancause both financial and emotional strain.

• Financial planning is critically important.

• A key component of that planning is tax planning andunderstanding appropriate deductions available toyour family.

Autism Is Challenging

2



The Autism Puzzle is Complex

Many of our children with autism spectrumdisorders need significant, specializedassistance and treatments, including,

among others:• Therapies, such as speech, OT and PT

• Medical specialists

• Private special needs schools

• Medications/supplements• Special diets

• Assistive communication devices

• Specially-trained caregivers

3



• The various forms of assistance that our

children need are expensive.

• Often the cost is not covered by insuranceor, if covered, is not covered in full.

•

As a consequence, families often spend asignificant portion of their income to helptreat their childs medical issues.

Autism is Expensive

4



WE ARE HERE TONIGHT TOHELP YOU WITH ANSWERS TO A

FEW KEY QUESTIONS:

• Are any of my expenses tax deductible?

• What are the limits on deductibility?

• I am drowning in paper … how do Idocument my deductions and organize my paperwork?

The Tax Puzzle

5



Medical Expenses

Pub. 502 at p. 2. 6



Medical Expenses (cont d )

!Medical expenses are expenses paid duringthe tax year at issue, regardless of whenthe medical care was given. See Pub. 502

at p. 3.

!Whose medical expenses am I allowed to

deduct? See Pub. 502 at pp. 3-5 for thedefinition of who qualifies as a dependent

for medical expense purposes.

7



Which Expenses Are Includable?

! The IRS provides an extensive list of includablemedical expenses at pp. 5-14 of Pub. 502.

! There also is a list of not includable expenses inPub. 502 at pp. 14-16. It is important to look atthese as well. Often exceptions to the notdeductible definition actually allow deductions forsome of the medical care needed by special needschildren.

8



A Few Examples of Includable Expenses:

! Acupuncture

! Chiropractor

! Lab Fees! Long-Term Care

. . . We will discuss many otherstonight as well.

9



7.5% Rule

Medical expenses up to the first 7.5% of

Adjusted Gross Income (AGI

) are notdeductible. See Pub. 502 at pp. 2, 3.

! AGI appears on lines 37 and 38 on your 1040.

! For example if your AGI is $100,000, the first $7,500 of

medical expenses are not deductible ($100,000 x 7.5%).

10



Alternative Minimum Tax (AMT)

! For AMT purposes, medical expenses up tothe first 10% of Adjusted Gross Income arenot deductible. Taxpayers who are subject to

AMT will have an AMT adjustment excluding

medical expenses for an additional 2.5% of their AGI.

11



Medical Deductions and IssuesPertaining to Special Needs Families:

! Tuition for a therapeutic school generally will qualify as a medical expense. See Pub. 502 at p. 13.

! While some legal fees are deductible (see Pub. 502 at

p. 10), legal fees incurred in trying to obtain servicesor tuition reimbursement from the Department of Education have been ruled not a deductible medicalexpense.

!

Supplements that are recommended by a medicalpractitioner to treat a medical condition diagnosedby a doctor may be deductible but supplements takenfor general good health reasons are not deductible.See Pub. 502 at p. 16.

12



Special Needs Deductions (cont d)

! Homeopathic treatment, as long as it is prescribed

by a medical doctor, should be deductible.

! Chelation therapy costs should be deductible if the

treatment is prescribed by a doctor.

! Therapeutic toys/tools should be deductible if

accompanied by a letter from a doctor substantiatingthat the item is for the treatment of the childs

condition.

13




! Lab fees for specialty labs like Doctors Data for

heavy metals testing (i.e., non-traditional testing)

should be deductible. See Pub. 502 at p. 10.

! Fees for non-US medical providers (such as the

French lab that runs specialized testing for

porphyrins) should qualify as long as the testing is

prescribed by a doctor.

! Home HBOT (hyperbaric) chamber should be

deductible as long as it is prescribed by a doctor.

14



Special Needs Deductions (cont d )

! Conferences (like the NAA HopeismConference, Autism One, and Defeat AutismNow!): conference fees and transportation to

and from conference are includable medicalexpenses, however meals and lodging at theconference are not includable medicalexpenses. See Pub. 502 at p. 11.

! Lodging and Travel Expenses to receivemedical care in another city may be deductiblewithin certain limits. See Pub. 502 at pp. 10,14.

15




! Transportation Expenses incurred in connection withmedical care are deductible. The limits and options withrespect to transportation expenses are explained at Pub.502 at pp. 13-14.

! Books to help parents understand and help their specialneeds child should be deductible along the same lines asconferences. See Pub. 502 at p. 11.

! Food for Special Diets: Tax courts have allowed the cost of special foods over the cost of a normal diet when thespecial diet is prescribed by a doctor to alleviate a medicalcondition. Special food that merely replaces food normally consumed is not a deductible medical expense.

16




! Therapeutic summer camp may be deductible for children who requireyear-round therapeutic services if the camp provides such services andyour doctor/neurologist/child psychiatrist prescribes it as essential.

! Autism service dogs may be deductible as a medical expense if the doghelps their owner minimize the effect of their disability and helps the

owner to perform everyday tasks. The IRS allows the cost of buying,training and maintaining a service dog as a medical expense.Veterinary expenses, food, and licensing would be consideredmaintaining the dog and, therefore, also would be considered medicalexpenses.

! An iPad that is used primarily as a communicative/therapeutic devicefor a person with autism may be deductible as a medical expense. Appswhich assist in using the iPad as a communicative/therapeutic device,such as Proloquo2go (a speech app), also would be deductible. An iPadthat is used for play or used primarily for purposes other than as acommunicative/therapeutic device would not be deductible.

17



Typical or Mainstream Classes

! Typical classes, such as martial arts or swimming, thata therapist/doctor recommended may be deductibleso long as the class is considered essential to treatingthe childs condition.

! You should obtain a written recommendation fromthe childs doctor stating that, for example, a childneeds socialization with typical peers and that goingto such a class is an essential part of the childstreatment.

! Classes/lessons taken to improve general health arenot deductible expenses. See Pub. 502 at pp. 15, 16.

18



Tax Status: Married Filing Separately. Married couples should consult

with their tax professional to determine if, in order to maximize the taxbenefit of medical deductions, the married filing separately statusshould be considered.

Reimbursements generally reduce medical expenses in the year thereimbursement is received. In some cases, reimbursements may betaxable. See Pub. 502 at pp. 16-19. This is particularly important forlarge deductions – such as tuition at a special needs school– that may bereimbursed in whole or in part in a different tax year.

Other Things to Consider

19



Employer Plans

! You should evaluate employer-provided plans such as aFlex Spending Plan because it gives you the opportunity to pay for medical expenses with pre-tax earnings.

! Medical expenses reimbursed by a flex spending plan donot qualify as medical expense for tax deduction purposes.

! Insurance premiums paid with pre-tax dollars (which is the

case for many employees) are not deductible. If you areself-employed, these premiums may be subject to differenttax treatment (not as a medical expense).

20



Timing of Receiving Tax Benefit

! What is the quickest way to get the benefit of a taxdeduction of a medical expense?! For salaried employees – adjust the payroll withholding on

your W-4 form to incorporate the anticipated medical expense

deduction for that tax year.

! For self-employed individuals who are paying estimated taxes– adjust the quarterly estimate payment to incorporate theanticipated benefit of the medical expense deduction.

! For those people who missed the medical expense deduction ina previous year, you can amend your previous years income

tax return. You can do this for tax years where the statute hasnot expired. The statute runs 3 years from the date of filing

your return.

21





Always Keep Medical Records/Receipts

! Even if you dont think you will qualify for a medicalexpense deduction, save your receipts. Unfortunately, younever know when a catastrophic medical bill could hit and

put you over the 7.5% bar, or, in these tough economictimes, when a change in employment circumstances couldreduce your income.

! Even though we are focusing tonight on deductible

expenses relating to children with special needs, savemedical receipts for ALL family members – everyone whoqualifies as your dependent for medical deductions countsand the co-pays and other expenses do add up.

23



Doctors Letter

! Get a letter from a doctor substantiating your childs need fortreatments like OT, PT, Speech Therapy, supplements, specialequipment, the need for you to attend conferences/buy books related toyour childs condition or treatment. Keep this in your general tax file.

!

Many pediatricians will provide such a letter. Other specialists yourchild sees might as well (e.g., neurologist, developmental pediatrician,Defeat Autism Now! doctor, mitochondrial specialist).

! Depending on the treatments you use, you may need letters from more

than one doctor.

! It may help for you to draft the letter for your doctor, have the doctorreview and approve before signing. If you make this an easy step foryour practitioners, they are usually amenable to helping you – they want your child to get the treatments he or she needs too!

24



– OR –

I AM SWIMMING IN PAPER

AND DONT KNOW WHERE TOSTART – WHAT DO I DO WITHALL OF THIS STUFF???

So you have a receipt from adoctor or therapist . . . What

now?

25



Substantiating Your Deductions

! Keep in mind what the IRS generally is looking for:

Pub. 502 at p. 20. 26



Basic Tips

! Find a system that works for YOU! A system can be the greatest systemin the world but if it does not work for you, it will work against you and youwont use it.

!

Many people use programs like Quicken to track their financialinformation. Especially if you prepare your taxes yourself using TurboTaxor similar products (http://www.turbotax.intuit.com), these programs canbe very helpful in organizing some of your information.

! File regularly – figure out what works for you – that may be daily, weekly,

or monthly. If your paperwork builds up, items may go missing and thetask becomes too daunting.

! Consider dedicating a pocket of a handbag or tote, a compartment of your

wallet, or a small coin purse or envelope as the spot for storing receipts onthe go, this way, they are all together for filing in your at-home system.

27



File Systems

! There are many purveyors of filing/paper storagesystems, some of my favorites include:

! the Container Store (www.containerstore.com)

!

Staples (www.staples.com)! Target (www.target.com)

! www.organize.com

! www.seejanework.com

! www.stacksandstacks.com

….to name just a few!

28



My System

!Two plastic file foldersfrom the ContainerStore:

" They are sturdy (more sothan paper files)

" They are expandable

" They are portable (andthey close)

"

I use two sizes so thatthe generally smallerreceipts (taxi, gas, etc.)dont get misplaced

29



My Categories

! In the Large File:! Flex to Submit (keep some

blank submissions forms heretoo)

! Flex Spending Pending! Flex Spending Paid

! Insurance to Submit (keep someblank claim forms here too)

! Insurance Pending

! Insurance Paid! Practitioners (not submitted to

insurance)

! Supplements! Labs

! Books/Therapeutic Toys &Tools

! Other

! In the Small File:

! Taxi

! Gas

! Tolls

! Rental Cars! Grocery

! Prescriptions

30



Submitting to Insurance

! If you think an expense may be covered by your insurance, submitit to your insurer first.

! Submit claims separately, one claim per envelope. Claims are lesslikely to be lost if they arrive separately (even if you mail several

on one day). If you submit too many in one envelope it is morelikely that one will get misplaced or skipped. Your insurer may also accept faxed claims. Faxes have the benefit of proof of receipt.

! Keep a copy of your claim form and the receipt from your

provider. Even with information available online from many insurers, the online information is no help if they lose your claimbefore processing it. This copy gives you all the information youwill need to resubmit, if necessary.

31



Submitting to Insurance (cont d )

! Staple your copy of the claim form and your receipttogether and note at the top the date you submit it toyour insurer and the method you used to send it (e.g.,

Fax 1/1/10 USPS 2/2/10) – this helps if you needto follow up with your insurer.

! File these documents in an Insurance Pending file.

!

If your doctor files claims from his or her office or if you file electronically, keep a record of visits andfollow up on whether your claims have beenprocessed.

32



Unreimbursed Amounts and Employer Plans

! When you receive your explanation of benefits(EOB) from the insurer, make sure it is accurateand, if so, staple the EOB to the claim form andreceipt (I like to staple it on top so I know I haveheard back from my insurer on that claim).

! If it has been paid in full, move the packet to yourInsurance Paid file.

!

If not, and if you have a Flex Spending plan, considersubmitting anything not paid by insurance to FlexSpending.

33



Unreimbursed Amounts and Employer Plans(cont d )

! Attach your Flex Spending form to the EOB/claimform/receipt and note the date you submit it and themethod you used to submit it.

! Move the whole thing to your Flex SpendingPending file.

! If Flex Spending pays the remainder in full, keep thedocumentation, along with your paperwork received

from Flex Spending in your Flex Paid file – Youdont want to commingle flex paperwork with yourtax receipts if Flex Spending paid the balance of yourclaim.

34



Potentially Deductible Amounts

! If Flex Spending did not pay a claim in full, if you do not have Flex Spending Benefits, or if you have exhausted your flex benefits for the

year:

! Your stapled documents for this claim can now go to theInsurance Paid file.

!

You can note on the document the amount that is now potentially tax deductible after insurance and/or FlexSpending reimbursement. This makes it easy at tax timeto identify your potential deduction on that claim.

35

P t ti ll D d tibl A t



Potentially Deductible Amounts(cont d )

! You will need to trace through your EOB and FlexSpending receipt to do this.

! Ask yourself:

! Did your insurer disallow part of your claim? Whatamount?

! Was there a co-pay? What amount?

! What portion of your out of pocket (co-pay and

disallowed amounts) did Flex Spending pay?

! The remainder is the number you will need for taxpurposes.

36



Reading an EOB

! You need to familiarize yourself with your insurers EOB todetermine what your deduction is on a given claim.

! Your deductions are based on what remains after the charge isreduced based on any agreement your provider may have withthe insurer and after your insurer pays its share.

! Your deductible amounts may include:

! not covered amounts (to the extent these do not represent feereductions)

! Co-pays

! Deductibles

! Co-insurance (for example, if you have a 70/30 plan – your 30%share of the allowed charge is a deductible amount)

37



Reading an EOB (cont d )

38



Reading an EOB (cont d )

The Provider

Charge

If you are responsible for this

amount, it is deductible

Any remaining amount on your annual deductible

that you had to pay on a claim

Co-Pays are Medical

Expenses

If this is less than 100% you can

calculate a further deduction here

39

Oth D t ti d



Other Documentation andHelpful Hints

• Use your Flex Spending dollars wisely. Expenses not covered by insurance may still be eligible for Flex Spending. These items eveninclude some OTC medications. Consult your Flex Spending accountinformation on reimbursable items. If you can use pre-tax dollars to be

repaid for items that are not tax deductible, it might make sense to use

Flex Spending dollars for those items before potentially tax deductibleitems.

• The best practice is to keep receipts and to document everything in caseof an audit.

• Remember that expenses, such as shipping from a compounding

pharmacy, should be deductible. Likewise, transportation cost to ahealth food store if the primary purpose is to obtain special diet foodsand shipping special diets food from an internet site also should be

deductible.

40



Other Documentation (cont d )

! If you use your car in connection with medical expensesand will take the standard medical mileage rate deduction,you should keep a mileage log (you can even keep it in thecar to be sure to have it when you need it). If you take

certain trips regularly, you should note the mileage forthose trips in your log once and you can then reconcile toyour calendar either regularly or at year-end.

! You can use a calendar or log book to reconcile receipts(especially for transportation-related receipts that do not

look medical on their face) to the dates on which youreceived medical care .

! File receipts promptly in the appropriate file so that they are ready for organizing at tax time.

41



Other Documentation (cont d)

• Try not to pay medical expenses with cash – credit cardsand checks are easier to substantiate.

•

Credit card monthly statements. I keep each card

sstatements in a separate file. At tax time I take them outand make copies, highlighting the various expenses(often they span categories and also include things likecharitable deductions) and I keep these copies in a

general tax file as additional backup.

• Make sure your family/caregivers are all on the samepage with respect to saving receipts.

42



Transportation Receipts – Taxis

! Save items such as taxi receipts for travel to/fromappointments.

! Paying with a credit card creates another check for

the purpose of a ride, you can reconcile yourstatement with your calendar.

! Even though individually these receipts are usually deminimis expenses, if this is your primary mode of

transportation with your special needs child toschool/appointments, the total dollar amounts spentwill be significant and it may be a good idea, in case of audit, to be able to substantiate these amounts.

43





Transportation Receipts – Cars

! Per the IRS, you can deduct the larger of either 16.5¢per mile for car travel for a medical purpose or your

actual expenses (gas and oil primarily). Tolls andparking are deductible in addition to either actualcosts or the statutory per mile deduction.

45



Maximizing Your Car Expense Deduction

Pub. 502 at p. 13. 46



Planes, Trains, and Automobiles

Out of Town Medical Travel Expenses! The cost of travel is deductible if you travel to another city

for medical care. The medical care must be the primary

purpose of your trip. A parent

s travel expense isdeductible when the parent is traveling with a child in needof medical care.

! Lodging (at $50 per person per night) also is deductible

when traveling out of town for medical treatment.! Meals are not deductible (except for the patient in a

hospital or similar facility).

47



Getting Ready to File Your Return

"Well before your tax return is due to be filed,organize your paperwork (again, this should bedone regularly throughout the year).

"For each category of expenses, organize the

documents in a way that works for you (forexample, all EOBs in chronological order or EOBs

separated by provider and then in chronologicalorder by provider).

48



Create Your Own Spreadsheet

! Create a document (in a word processing or spreadsheet programwith which you are comfortable) that allows you to track theexpenses by category or groups of categories. Even a table in aword processing program can add a column of numbers (formulafunction). You can include columns for:

! Category of expense (e.g., prescription, doctor, lab)! Provider name

! Which family member incurred the expense

! Amount of potential deduction

! Type of documentation to support payment/amount (EOB,receipt, credit card statement)

! You can use the same document and save it as a new version eachyear and simply adapt it to any changing needs – no need toreinvent the wheel.

49



Create Your Own Spreadsheet (cont d )

! This document will help you and your tax preparerprepare your return more efficiently.

! If you use Quicken or similar programs, theprogram may help you organize this information.

50

My child is on a special diet can I deduct the



My child is on a special diet, can I deduct thecost of her special foods?

! As was discussed earlier, under certain

circumstances, the difference between the cost of

the special food and an equivalent normal

grocery item is deductible.! If your child is on a special diet, it may be worth

tracking this information for a few months to see

if this is a worthwhile deduction for you.

! There is no way around the fact that tracking this

is tedious.

51



Special Diets (cont d )

! You may be able to use a website likehttp://www.freshdirect.com to determine the costof normal equivalents.

! There is definitely some math involved here,especially if your special product and the regularequivalent are sold in different sizes.

!

http://www.tacanow.org has a handy template ontheir website.

52



Special Diets Math

! Flours are a great example of the math involved:

! most regular flour comes in a 5 lb bag but many specialflours (rice, garbanzo, nut) are sold in smaller sizes.

! To make the example easy, if a 5 lb bag of flour is $5, it is$1 a pound.

! If the 2 lb bag of rice flour is $8, it is $4 a pound.

! The per pound difference is $3, which you multiply by 2

(to account for your two lb bag of rice flour), for adeductible difference of $6 a bag. The $6 per bagdifference is then multiplied by the number of units youpurchased throughout the year.

53



After You Have Filed Your Return

• Keep copies of everything you send yourprofessional tax preparer.

• After our taxes are filed, I move all my taxdocumentation (medical and other) to a file box,containing file folders labeled with the tax yearand my various categories of receipts and other

documentation (e.g., 2010 –Prescriptions).

54



T h e i n f o r m a t i o n c o n t a i n e d h e r e i n a n d

p r o v i d e d a t t h e M a r c h 2 , 2 0 1 1 p r e s e n t a t i o ni s f o r i n f o r m a t i o n a l p u r p o s e s o n l y a n d d o e sn o t s u b s t i t u t e f o r t a x a d v i c e f r o m y o u r o w n

t a x a d v i s e r , f a m i l i a r w i t h y o u r f i n a n c i a li n f o r m a t i o n . N A A - N Y M e t r o a n d t o n i g h tsp r e s e n t e r s m a k e s n o w a r r a n t i e s , e x p r e s s o ri m p l i e d , a s t o t h e a c c u r a c y o f i n f o r m a t i o n

p r e s e n t e d t o n i g h t a n d i n t h i s h a n d o u t . A sa l w a y s , o f f i c i a l s o u r c e s a n d p u b l i c a t i o n sa n d y o u r o w n t a x p r o f e s s i o n al s h o u l d b ec o n s u l t e d f o r t h e m o s t c u r r e n t r u l e s a n d

r e g u l a t i o n s t h a t m a y b e a p p l i c a b l e t o y o u .

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03 02 11 PNEM Presentation