Personal Finance

Special-needs families may get squeezed by tax reform

Key Points
  • The medical expense deduction, which can allow parents of special-needs children to deduct for therapies and copays, would be eliminated under the GOP tax plan.
  • Special-needs families should consider making any necessary large medical purchases, including home renovation, this year.

Gerardo and Mercedes Orozco have two daughters with autism spectrum disorder: Karla, 14, and Andrea, 12.

Each child may have more than a dozen doctor appointments in a typical year, Gerardo said, plus hours of therapy, including occupational and speech therapy, and more.

The couple said they pay as much as $50,000 per year out-of-pocket in healthcare costs. Until now, Gerardo was able to deduct a large portion of those expenses from his taxes because of a medical-expense deduction that is slated for elimination under the Tax Cuts and Jobs Act, released on Nov. 2.

The Orozco family. Daughter Karla, left, and Andrea, right, both have autism spectrum disorder.
Provided by Gerardo Orozco

"For the few people like us who use it, it's a huge advantage," said Gerardo, who is an electrical engineer and lives with his family in Escondido, California. "We have this mountain of expenses every year."

The medical expense deduction allows families to deduct for qualified healthcare expenses that exceed 10 percent of adjusted gross income in a given year. In 2015, the most recent year for which data is available, about 8.8 million filers claimed the deduction, for medical expenses totaling about $87 billion.

Regina Levy, a Los Angeles-based certified public accountant whose practice focuses on families with special-needs members, said she estimates her clients will see their tax bills rise by $2,000 to as much as $60,000 as a result of the loss of the tax break.

She said the deduction is typically claimed by families who earn at least $60,000 annually, since below that income level most families do not itemize and instead claim the standard deduction.

Katja Kircher | Getty Images

"Our clients are very concerned that losing this deduction is going to significantly impact how they can treat their children," said Levy. "Their children are going to receive fewer services because of this, because the money has to come from somewhere."

Parents can count a child's copays and therapy costs, which private insurance may cap at a certain number of sessions per year, towards meeting the 10 percent threshold, Levy said.

Other expenses may also count, including fees for specialized preschools or residential treatment centers, purchasing medical equipment to use at home, or for a parent to attend a relevant disability-related conference, said Levy.

Both of Orozco's daughters have gastrointestinal problems and so are on restrictive diets. He is currently able to deduct the extra expense the family incurs in meeting their diets – deducting, for example, the premium that a loaf of gluten-free bread costs over an ordinary loaf of bread.

"It's quite a task to collect all the receipts and do the comparison, but at the end of the day it helps with the expense," he said.

Bob Brogan, president of the Brogan Law Group in Point Pleasant, New Jersey, said he is telling the special-needs families he works with that they should assume that a tax-reform bill will pass.

If you have anything significant that you need to buy, now's your chance. That's become part of our year-end tax-planning advice.
Bob Brogan
president of the Brogan Law Group

"If you have anything significant that you need to buy, now's your chance," said Brogan. "That's become part of our year-end tax-planning advice."

That might mean moving up a home-improvement project, if the project is for medical reasons, said Martin Shenkman, founder of Fort Lee, New Jersey-based Shenkman Law.

Able accounts for special needs children
Able accounts for special needs children

"Renovations to make a home safe and secure for a special-needs child can run into the tens of thousands of dollars, and sometimes hundreds of thousands of dollars," Shenkman said. "If you've been thinking about renovating your house, you'd better do it now."

Shenkman said he personally used the deduction when renovating his residence to accommodate the needs of his wife, who has multiple sclerosis. His savings from using the tax break were significant, he said.

The deduction can also help in specific years in which a child requires a lengthy hospitalization, said Rob Wrubel, a financial planner in Colorado Springs with Cascade Investment Group. Wrubel said his family used the deduction the year his oldest daughter, who has Down syndrome, was born, because she required a six-week hospital stay after her birth.

"It's not like we made money on it, but it made a difference to being able to provide for my family," Wrubel said. "Families with special-needs members just need every break they can get."

The medical-expense deduction isn't the only significant break for families of special needs kids. Parents can save up to $14,000 per year in an ABLE account for a child diagnosed with a qualifying disability. Balances in the accounts grow tax-deferred, and distributions for qualified disability expenses aren't taxed.

Orozco's daughters' years of treatment have been expensive, but they've also yielded results, he said.

"We've had good progress, and they're doing things that we never thought they were going to do," he said. "We're trying to put the time and energy now into making them as functional as possible, so that they can become taxpayers in the future."