Don't Overlook Disability-Based Tax Breaks

Take a close look at expenses, and be ready to justify your deductions

by Alyssa Quintero on January 1, 2007 - 3:17pm

QUEST Vol. 14, No. 1

Although the term "disability" doesn't always appear in Internal Revenue Service definitions, many deductions and credits hold special importance for people with disabilities.

Tip 1 — Shop around when selecting an accountant or financial adviser

"You're not going to find an accountant with pre-made expertise [in the area of disability], but you need someone who knows how to think through the issues," explained Steven Mendelsohn, an attorney and author of Tax Options and Strategies for People with Disabilities (Demos Medical Publishing).

Search for someone who either knows about disability-related deductions or is willing to do the research. Be sure to check credentials and office accessibility.

Free federal and state tax preparation help is available for people with low to moderate incomes ($39,000 and below), through Volunteer Income Tax Assistance (VITA). Some VITA programs have teamed with community disability organizations and offer enhanced accessibility and knowledge of disability-based deductions, but this isn't true in all areas. Call (800) 829-1040 to learn more.

Tip 2 — Provide your financial adviser with as much information as possible

Because it can be difficult to know where disability and other tax issues intersect, be sure to bring any and all expenses to your financial adviser's attention to determine whether they'll make a difference in what you owe.

Tip 3 — Don't be timid

The tax code should be used only as a guide when determining what's deductible, advised Mendelsohn.

"The list [of deductible items] is just an illustrative list based on cases that have been litigated over the years. It can't anticipate new situations, so people shouldn't assume that it's definitive," Mendelsohn said. Focus instead on the rationale for the expenses, he said.

Deductions for disability-related expenses fall into a "gray area" where some accountants fear to tread, mainly due to the lack of clear-cut guidelines. Don't be afraid to prepare your own taxes. Tell the truth, keep extensive documentation, and be ready to make your case.

Tip 4 — Show how deductions affect your disability

Many people, disabled or not, would like to deduct house cleaning and yard services. But even though muscle disease may prevent you from dusting and mowing, these services aren't automatically deductible.

Under "Qualified Long-Term Care Services" (IRS Publication 502, 2005), the IRS allows deductions for "maintenance and personal care services." These services provide a qualified individual with "needed assistance with his or her disabilities," or address "threats to health and safety."

In other words, you must be able to prove that a dirty house or overgrown lawn directly affects your disability or threatens your safety and health. For example, if you have respiratory problems related to your disability and must use these services to remove dirt and weeds that make it hard to breathe, that's a deductible expense.

Keep extensive financial records, doctors' notes and prescriptions to justify these deductions, Mendelsohn said.

Tip 5 — Deduct work-related expenses

Impairment-related work expenses (IRWEs) are worth more than medical deductions because every penny is deductible (provided you're itemizing your deductions). IRWEs are unreimbursed expenses relating to your disability that are necessary in order for you to work. Examples include such things as special computer software and, in some cases, personal assistance services.

Tip 6 — Take credit

The Earned Income Credit (IRS Publication 596) benefits low-income individuals and families with qualifying children, including adult children with disabilities who live at home. In November, the National Disability Institute, with support from the IRS, launched the 2007 Real Economic Impact Tour in 54 cities to highlight this little-known credit, which can benefit many. The tour offers free tax assistance and promotes the credit "because there are so many people with disabilities who work, and don't know about or take advantage of it," Mendelsohn said.

The Child/Dependent Care Credit (IRS Publication 503) covers caregiving costs, including those for spouses and adult children with disabilities who live at home.

The Credit for the Elderly or Disabled (IRS Publication 524) may be claimed by low-income people 65 or older, or retired on permanent and total disability.

Tip 7 — Plan expenses

Grouping medical expenses in a single tax year, especially purchases of big-ticket items, may help you get over the threshold of 7.5 percent of adjusted gross income, advised Mendelsohn. When expenses exceed this threshold, the excess is fully deductible.

The bottom line: Be proactive, keep good financial records, take advantage of what's available, and justify your deductions. And if you missed something, remember you can go back three years and file amended returns.

Quest Articles
"Take It All Off... Take 2," January-February 2005
"Get Yours! Don't Overlook Disability Tax Breaks," January-February 2006
(Editor's note: Be sure to check out the category above on Taxes for current stories, too.)

Internal Revenue Service
(800) 829-1040

Real Economic Impact Tour - National Disability Institute
(202) 521-2931

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