Raising kids can be expensive! And, if you have to get specialized care for a child with special needs, it can be even more expensive. That’s why in this lesson, we’ll walk through how to deduct the educational costs associated with managing your child’s special needs as a health-related expense.
Before we dive into the meat of this lesson, let me first outline what may qualify as special needs education.
What is special needs education?
Special needs education can be classified as teaching special skills (such as Braille or sign language), programs for children with learning or physical disabilities, and/or using a learning environment where intellectually or physically-challenged students can adjust to a mainstream classroom.
Health is defined as anything health and wellness related. This can include special needs education since it helps to improve the child’s cognitive, social and emotional well being.
As of now, there are no direct deductions you can take on your taxes, other than itemizing medical deductions, if your child requires extensive medical care. However, when it comes to educational costs, there is only one way you can deduct this expense. You can utilize Section 105 – Health Reimbursement Agreement (HRA).
Now, even if you have more than one employee, there are ways to get around this based on what the IRS defines as an “employee”.
Here are four ways you could exclude your employees according to what the IRS requires for a Section 105 plan:
-They have worked less than 3 years of service
-They are under the age of 25 years old
-They work less than 25 hours a week
-They work less than 7 months out of the year
This means any part-time, seasonal employees or interns you may have included under the Section 105 plan guidelines.
In order to not raise any red flags when you deduct the special needs education expenses for your children, you need to make sure you collect a reasonable wage from your business.
It’s a bit of hocus pocus because there is no definition given by the IRS to outline what a reasonable wage is. You can, however, look up online guides and salaries in your area for comparable positions to get an idea of what the average market rate would be.
The important thing is you must collect a reasonable wage and that wage must be comparable to the level of special needs education expenses you are trying to deduct. For example, if you collect a wage of $5,000 but you have $50,000 in special needs education expenses each year, this is a major red flag! However, if you collect $70,000 in annual wages and claim $50,000 in expenses, this is less alarming.
With Section 105, you can deduct health-related expenses, like special needs education, for dependents up to the age of 27.
To qualify this special needs education expense, you would need to have a doctor’s note to verify a specialized school is needed to improve your child’s well being. With that documentation, you can then deduct tuition, meals, lodging, transportation to and from school, and the cost of educational materials. So, a $50,000 tuition could easily balloon into a $70,000 annual health-related expense deduction through your Section 105 plan.
The key is to understand what you can deduct and following the right steps/guidelines to get the tax savings. If you are paying for your child’s special needs education without utilizing a Section 105 plan, you’re leaving a significant tax deduction on the table.