Tax-Deductible Special Education Costs

According to ongoing studies by the CDC and the Autism and Developmental Disabilities Monitoring (ADDM) network, one of the CDC’s specialized research branches, both autism, and other related developmental and neurological orders have steadily increased over the years[1]. While figures are mostly focused on Autism Spectrum Disorder, other disorders, like dyslexia, Asperger syndrome, and ADHD have all seen increased diagnosis spikes since 2010.[2] Of course, recognizing, diagnosing, and understanding these disorders is by and large a medical issue. Treatment is when they become a tax issue.

Specialty schools, rigorous therapy regimens, and medication have all proven to be effective modes of treatment for these disorders including autism, dyslexia, and Asperger syndrome. They also represent an incredible financial burden even to the wealthiest of taxpayers. In this regard, interpretations of the tax code have managed to keep pace with socioeconomic trends. Many of these costs, including those of specialized education, can in fact be deducted as medical expenses. However, the tax law regarding the deductibility of these expenses can often be unnecessarily dense and subject to interpretation. An example from the Internal Revenue Code, Section 213:

“There shall be allowed as a deduction the expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, his spouse, or a dependent… for purposes of this section— the term “medical care” means amounts paid— for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure of the body.”

As simplistic as this text is, it raises more questions than it answers, particularly with regards to the accepted and encouraged treatment of social, developmental, and neurological disorders. Would tuition for a visually-impaired child attending Perkins School for the Blind count as an expense towards treatment? Does installing a ramp for a wheelchair-bound person suffering from multiple sclerosis rate as mitigation of a disease? Unfortunately, the only accurate answer to these questions is sometimes, but we’ll do our best here to provide some clarification.

Specialty Schools

Most treatment expenses are those incurred for specialty schools. By definition, specialty schools are educational institutions that tailor their curriculum to the teaching of children with severe learning disabilities, caused either by mental or physical impairment, which include, but are not limited to, nervous system disorders, dyslexia, and blindness. According to the U.S. Treasury’s IRS-issued regulation regarding special education expenses, the tuition expense incurred for any dependent attending such a school is considered tax-deductible, and is to be treated as a medical expense.

There are other expenses that can be considered tax-deductible as medical expenses. They include:

  • Related tutoring fees for a specialized instructor who is trained/qualified to work with children with severe learning disabilities
  • Additional educational costs incidental to the special services the school provides, such as:
    • Meals
    • Lodging
    • Transportation
  • Therapy, both mental (psychotherapy and speech) and physical (patterning)
  • Legal fees necessary to authorize treatment for mental illness
  • Assisted technology tools
  • Evaluations

While there may be benefits from course of study or the disciplinary methods used at a specialty school, the IRS does not recognize that as a necessary medical expense. In that light, the second caveat is that even if the student has a diagnosable learning disability, in order for the IRS to allow the taxpayers to deduct specialty school costs as medical expenses, a doctor has to recommend this form of treatment in writing.  There are two major caveats to deducting these costs as medical expenses. The first is that the IRS requires that the main reason for a student attending a specialty school be its resources for relieving the disability of the student. Sending students who may be troubled, but who do not suffer from a diagnosable learning disability, IS NOT TAX-DEDUCTIBLE.

Incidental Programs

Although specialty schools are popular as a form of comprehensive treatment, they aren’t a viable option for everyone. Tuition can be expensive, enrollment competitive, and selection of schools limited. This difficulty can be doubly true for parents of students who suffer from disorders such as depression, anxiety, and even dyslexia. They have to contend with the stigma that these disorders are eminently more treatable; doctors are less likely to recommend students suffering from these disorders attend specialty schools, even if they would receive pronounced benefit from such a learning environment. If a parent were to send their child to a specialty school without the doctor recommendation, under IRS guidelines the tuition and expenses would be non-deductible. Fortunately, there are alternative, more affordable, and more normalized methods of treatment that the IRS will still allow as medical deductions, namely the use of incidental programs.

An incidental program can be classified as any in- or out-of-school treatment program designed to help students with neurological disorders and disabilities, and occurs as supplement to ordinary education. Some private schools may offer in-school counseling and therapy for students with depression and anxiety. Others offer support groups, and special education curricula for students with dyslexia or ADHD. If the programs that are designed to help mitigate a student’s disability come at an additional cost to the tuition for an otherwise ordinary education, the expense is allowable as a medical deduction. It is important to note, the tuition for any ordinary school, even if the reason for the student attending that school is its special education program, is NOT DEDUCTIBLE. Onlythe costs for incidental programs can be deducted, and then only after having been recommended in writing by a doctor.

The IRS’ policy in this regard extends to colleges and universities as well. While the tuition won’t be tax-deductible, any and all supplemental educational programs geared towards helping students cope with their educational disorders is deductible. There are even certain specialized universities, much like special schools, that provide courses designed to help students with educational disorders, and allow for part-time attendance. The tuition for these specialized schools, dependent on doctor recommendation, can be fully deducted.

Capital Expenditures

Another important category of cost related to treatment and mitigation of neurological disorders is that of capital expenditure— any change or improvement to the home that rises to the qualifications of a capital asset. Installation of elevators and ramps, the lowering of cabinets, widening of hallways and doorways; all of these are examples of capital expenditures. Because these changes tend to be made out of medical necessity, the IRS considers them deductible medical expenses. Capital expenditures are broken into two categories which have distinct tax treatments:

Category 1: An expenditure that improves the taxpayer’s residence while also providing medical care. Some examples might include:

  • Installation of an elevator
  • Expansion of home
  • Pools

Because the end result of such an expenditure is an increase in the property’s value, the IRS doesn’t allow for a total deduction. Instead, the deductible amount is whatever amount of the expense EXCEEDS the documented increase in the property’s fair market value. For example, if the installation of an elevator costs $10,000, and as a result, the property sees a $3,000 increase in fair market value, $7,000 is considered fully tax-deductible as a medical expense. We strenuously advise documenting these values with appraisals.

Category 2: An expenditure that removes structural barriers in the home of an individual with physical limitations. This would include all construction and related costs to things like:

  • Widening of doorways
  • Customization of bathing facilities
  • Lowering of kitchen cabinets
  • Installation of an entrance ramp
  • Installation of hand-rails

These expenses tend to be fully deductible, as the IRS presumes the changes don’t add any intrinsic value to the property. In their view, placing hand-rails throughout a house may be helpful to the individual who needs them, but there is no guarantee such an installation would have a marked positive effect on selling the house later on.

For anyone looking to deduct these costs as medical expenses, the IRS has laid out only two major stipulations:

  • The expenditure must be incurred out of medical necessity for primary use of the individual requiring medical care. Under this stipulation, if there is no one who medically requires it, installing a ramp to a house DOES NOT qualify as a medical expense.
  • The total expenditure must be reasonable in amount. Choosing to install a $50,000 elevator instead of one that costs $10,000, unless a valid reason (such as performance, function, or area requirements) is given, would be considered unreasonable.

NB: If there is one source of debate regarding capital expenditures, it would be around the decision-making of how one should be categorized. Sometimes, a ramp installation can increase the fair market value of a home. Sometimes it can decrease it. Whether or not the property itself receives a noticeable bump in fair market value should be the main determining factor of whether a capital expenditure falls into the first or second category. Documenting the market value changes is crucial, especially in the instance of an IRS audit.

Medical Conferences/Seminars

One of the last potential treatment costs the IRS will allow as a medical deduction are those incurred from attending medical conferences and seminars. Of all the categories of special types of medical deductions, this is probably the most straightforward. Taxpayers are allowed to deduct any cost associated with attending a medical conference or seminar, including:

  • Registration fees
  • Cost of travel
  • Hotel
  • Ground transportation
  • Meals

As always, in order to be fully deductible, the seminar or conference must be stipulated as necessary by a doctor’s recommendation, the conference must be directly concerned with treatment deemed essential to the dependent’s medical care, and must be the primary reason for attendance. Taxpayers who have a dependent with dyslexia, but attend a conference that explores alternative treatments for ADHD WOULD NOT be able to deduct the expenses incurred therein. The conference has to be related to the dependent’s disability.

Non-Allowable Expenses

Just as important to know as the type of special needs costs that are allowable as medical deductions are those that are not allowed. They tend to range in category and reason for non-deductibility, so we’ll list a few of them out here. The following are NON-DEDUCTIBLE:

Legal fees for the person being treated. Only legal fees incurred to authorize treatment are deductible, not those incurred to determine who pays for treatment.

Fees incurred for conducting the affairs of the person being treated. This category includes investment account management fees and bank fees.

Any cost that is unrelated to the physical care-taking of the person being treated.  Almost everything that the IRS allows to be deducted as a medical expense has to be doctor prescribed. Dietary and clothing preferences, while perhaps helpful in impacting a person suffering from anxiety’s day-to-day mood, if not prescribed by a doctor, will not be regarded as a related physical care-taking expense by the IRS, and only then, only the difference in price between two items may be deducted. For example, if a package of gluten-free bread costs $8, and a package of regular, whole-wheat bread costs $4, only the $4 difference is deductible.

Fees incurred for the management of a guardianship estate.

As a final note, after determining whether expenses qualify as a medical expense, there are two other thresholds to overcome in deducting these costs.

  • For 2020, only the expense that exceeds 7.5% of adjusted gross income will be added to the itemized deductions. Itemized deductions include qualified mortgage interest, state and local taxes not to exceed $10,000, and charitable contributions.
  • If the expense exceeds 7.5% of the adjusted gross income, and if no other deductions are being taken, the excess amount must then exceed the standard deduction. The standard deductions for 2020 are $12,400 for a single person, $18,650 for heads of household, and $24,800 for married couples filing jointly. These amounts increase in 2021.

Because these deductions can be quite large, documentation is key. The expenses MAY trigger an IRS audit, so documentation of diagnoses and physician recommendations are crucial to supporting expense deductibility.

[1] Research report published on CDC website in 2016, and written by over thirty doctors. The study itself monitored the prevalence of Autism Spectrum Disorder among children aged 8 years old.

[2] This according to a report on published in the Official Journal of the American Academy of Pediatrics, and written by nine individual doctors.

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