FYI!

SchwabLearning.org <BLOCKED::image001.gif>



Year 2005 Tax Benefits for Parents of Children with Learning Disabilities

If you have a child with a severe learning disability (LD), you may qualify
for valuable tax benefits. If your child has AD/HD, or other physical,
mental, or emotional impairment, you may also qualify for tax benefits.
Because tax laws are complex, and many tax preparers often do not have
occasion to use these unique tax benefits, families are at risk of losing
refunds worth many thousands of dollars. It's likely that 15-30 percent of
families with a disabled child have one or more unclaimed tax benefits.

This guide provides a brief summary of the most significant federal income
tax benefits and should not be considered legal advice. Tax decisions should
not be made simply on the basis of the information provided here. You are
advised to print out this guide and give a copy to your tax advisor. You
should also explore potential state income tax benefits, which are too
numerous for review in this guide.

Internal Revenue Service (IRS) "Publications" represent the most accessible
form of guidance to the tax rules for the general public, and relevant IRS
publications are cited for each of the tax benefits listed below. The IRS
also issues interpretations of the code and regulations called "Revenue
Rulings." These interpretations are formal, binding policy statements. Tax
professionals rely on revenue rulings in advising clients about tax
liabilities and tax benefits. For example, Revenue Ruling 78-340, discussed
later, authorizes a medical expense deduction for tuition or tutoring fees
paid for a child with a severe LD who is attending a special school at the
recommendation of the child's doctor.

<BLOCKED::image002.gif>
<BLOCKED::image003.gif>

Tip: Relative caretakers, such as grandparents or aunts, and non-relative
caretakers, such as foster parents, also may qualify for tax benefits.

Tax Benefits: Deductions vs. Credits

It's important to distinguish between two different categories of tax
benefits. One category is a "deduction from taxable income" or simply "a
deduction." The value of a deduction is based on the marginal tax rate of
the taxpayer. If a person has a tax deduction "worth $1,000," the actual
value of the deduction will be determined by the taxpayer's tax rate. So a
taxpayer in the lowest tax rate bracket, 10 percent, will have taxable
income reduced by $1,000, and save $100 (10 percent of $1,000). However, a
taxpayer in a higher bracket, for example, 28 percent, will have taxable
income reduced by $1,000, and save $280 (28 percent of 1,000).

The second tax benefit is a tax credit, which is a dollar-for-dollar
reduction in tax liability. An individual with a tax credit worth $1,000
will have his tax bill reduced by $1,000. This means that the actual amount
of taxes is reduced by the amount of the tax credit. However, because tax
laws and procedures are very complicated, other factors can influence the
ultimate value to the taxpayer.

The following summarizes the principal tax benefits that may be available to
families caring for children with severe learning disabilities.

Retroactive Claims for Refunds

The IRS allows taxpayers to file amended returns, and collect refunds for
unclaimed tax benefits, retroactively up to three years. This means a
taxpayer can file an amended return for the 2002 tax year (and also for the
2003 and 2004 tax years) and claim a refund if the return is filed not later
than April 15, 2006. (See IRS Publication 17, Your Federal Income Tax, 2005,
at pp. 18-19.)

Medical Expense Deductions

The IRS has ruled that tuition costs for a special school that has a program
designed to educate children with learning disabilities and amounts paid for
a child's tutoring by a teacher specially trained and qualified to deal with
severe learning disabilities may also be deducted. (Revenue Ruling 78-340,
1978-2 C.B. 124.) Special instruction or training or therapy, such as sign
language instruction, speech therapy, and remedial reading instruction also
would be deductible. Related books and materials can qualify for the medical
expense deduction.

Generally, to qualify for the deduction, the child's doctor must recommend
the special school, therapy, or tutoring, and there must be a medical
diagnosis of a neurological disorder, such as severe LD, made by a medical
professional. Transportation expenses to the special school or to the tutor
also qualify for a medical expense deduction. If transportation is by car,
the allowable expense in 2005 is fifteen cents per mile plus parking and
tolls, or the actual cost of operating the vehicle.

Diagnostic evaluations also qualify for a medical expense deduction. This
can include testing by a speech-language pathologist, psychologist,
neurologist, or other person with professional qualifications.

Note: Expenses claimed as a medical expense deduction and later reimbursed
by a school district or insurance company must be reported as taxable income
for the year in which the reimbursements are received.

Not everyone who has medical expenses can use them on their tax return.
Medical expenses must be claimed on Schedule A, Itemized Deductions, and are
subject to certain limitations. First, the family must have itemized
deductions that exceed their standard deduction in order to use Schedule A
(about 65 percent of taxpayers do not itemize for this reason). Second,
medical expenses are allowed as a deduction only to the extent that they
exceed 7.5 percent of adjusted gross income, a significant threshold for
many families. (See IRS Publication 502, Medical and Dental Expenses.)

Health Saving Accounts & Flexible Savings Arrangements

Alternative approaches to obtaining tax benefits in connection with medical
expenses may involve use of a Health Saving Account (HSA) or a Flexible
Savings Arrangement (FSA). An HSA allows a worker to use up to $5,250 in
pretax income for medical expenses. An HSA may only be opened where the
employee has a "high deductible" health insurance plan. Amounts placed in
an HSA may be carried over to following years if not used.

A Flexible Savings Arrangement (FSA) can be part of a "cafeteria plan" of
alternative fringe benefits offered by an employer. An employee can allocate
pre-tax income to the account, and then withdraw it during the year to pay
for medical expenses. Employers may also make contributions to the FSA, and
the maximum amount is set by the terms of the employer plan. Two important
conditions are that the amount to be placed in the account must be
determined by the employee at the beginning of the year, and funds not used
by the end of the year are lost. The employer's human resource office can
provide more information. Also, see IRS Publication 969, Health Savings
Accounts and Other Tax-Favored Health Plans.

Deduction for Disability Related Conferences

In May 2000 the IRS issued Revenue Ruling 2000-24, which offers guidance -
and good news - for parents of children with disabilities. Parents who
attend conferences to obtain medical information concerning treatment for
and care of their child may deduct some of the costs of attending a medical
conference relating to a dependent's chronic health condition. The important
points to remember are:

* Medical expenses are deductible only to the extent that they
exceed 7.5 percent of an individual's adjusted gross income, and that
limitation applies to this deduction as well;

* Costs for admission and transportation to a medical conference
relating to your dependent's chronic health condition are now deductible, if
the costs are primarily for and essential to the care of the dependent.

* Costs of meals and lodging related to a conference, however, are
not deductible. (Note, however, lodging, up to $50 per night, is deductible
if you must travel and stay at a hotel while your dependent is receiving
medical treatment from a licensed physician in a hospital or a related or
equivalent setting.)

* Costs are "primarily for and essential to the care of the
dependent" (and therefore deductible) if:

o The parent attends the conference upon the recommendation of a
medical provider treating the child;

o The conference disseminates medical information concerning the
child's condition that may be useful in making decisions about the treatment
of or caring for the child;

o The primary purpose of the visit is to attend the conference. While
at the conference, the parent's social and recreational activities in the
city he or she is visiting are secondary to attendance at the conference;

o The conference deals with specific issues related to a medical
condition and does not just relate to general health and well-being.

Child and Dependent Care Credit

The Child and Dependent Care Credit is allowed for work-related expenses
incurred for dependents of the taxpayer. Generally the dependent must be
under the age of 13. However, if the child has a disability and requires
supervision, the age limit is waived. For example, a 16-year-old with severe
AD/HD and a behavior disorder who cannot be left without adult supervision
would be a qualifying child for this credit.

Expenses up to $3,000 per year for one qualifying dependent and up to $6,000
for two or more qualifying dependents are allowed. Expenses for regular
childcare services, after-school programs, and summer camp qualify although
overnight summer camp expenses do not. Payments to a relative to care for a
child also qualify, as long as the relative is not a dependent of the
taxpayer. The credit is calculated at 20-35 percent of allowable expenses,
based on the family's adjusted gross income. The average credit is about
$600 but can be as high as $2,100. (See IRS Publication 503, Child and
Dependent Care Expenses.)

Exemption for Dependents

A taxpayer is entitled to claim an exemption for each qualified dependent.
This may appear relatively straightforward, but caretakers, such as
grandparents, aunts, or even foster parents, may overlook exemptions. Also,
in some cases following a divorce, a non-custodial parent who provides the
majority of support for a child with a severe LD, and also pays for
medical/educational expenses related to the child's LD, may likewise qualify
for both the exemption and medical expense deductions. A new definition of
"qualifying child" took effect in the 2005 tax year; the most significant
change is that the taxpayer need not show support for a "qualifying child"
but the child must have lived with the taxpayer for more than six months
during the tax year. For each dependent, there is an exemption from taxable
income, worth $3,200 for the 2005 tax year. For a taxpayer with a marginal
tax rate of 25 percent, each exemption will reduce the tax liability by
$800. Equally important, the dependency status is required for some tax
benefits such as the child and dependent care credit listed above. Also
dependents under age 17 qualify for the Child Tax Credit, worth up to $1,000
per child. (See IRS Publication 501, Exemptions, Standard Deduction and
Filing Information, and Instructions to Form 1040.)

Earned Income Tax Credit

Families filing a married joint return with adjusted gross income under
$37,263 ($1,000 less for taxpayers filing as single or head of household)
may qualify for the Earned Income Tax Credit (EITC) based on the presence of
one or two "qualifying children" in the taxpayer's home. For EITC purposes,
a "qualifying child" is a biological child, adopted child, step child, or
foster child who resided with the taxpayer for more than six months during
the calendar year, and is under age 19 at the end of the year. A
"qualifying child" is also a child age 19-23 who is a full-time student for
at least one semester. Finally, a severely disabled child is a "qualifying
child" without regard to age, even into adulthood, as long as the child
continues to live with his parent(s). Note that a "qualifying child" for
EITC does not have to meet the requirements for a dependency exemption.
EITC benefits are as high as $4,400 for families with two or more qualifying
children, although the average EITC nationally is about $1,800. (See IRS
Publication 596 for more information.)

Where to Get More Information

The IRS provides free booklets that cover each of the topics listed above.
The titles listed below may be ordered by calling the IRS toll-free number:
(800) 829-3676. Generally, taxpayers may order up to three copies of any
publication or form. The following booklets may be helpful:

* IRS Publication 17: "Your Federal Income Tax" (a comprehensive
300+ page guide)

* IRS Publication 502: Medical and Dental Expenses

* IRS Publication 503: Child and Dependent Care Expenses

* IRS Publication 501: Exemptions, Standard Deduction and Filing
Information

* IRS Publication 596: Earned Income Tax Credit

* IRS Publication 969, Health Savings Accounts and Other Tax-Favored
Health Plans

Extensive information can also be obtained from the
<BLOCKED::http://www.irs.gov/formspubs/index.html> IRS. The
<BLOCKED::http://www.abanet.org/tax/sites.html#state> American Bar
Association Section on Taxation contains links to scores of tax related
sites.

Tax Counseling and Tax Preparation Assistance

<BLOCKED::http://www.aicpa.org/states/stmap.htm> Certified Public
Accountants (CPAs)represent one source of tax advisors, although not all
CPAs have expertise in this area.
<BLOCKED::http://www.naea.org/MemberPortal/StateAffiliates/Listing/>
Enrolled Agents are individuals licensed by the IRS to represent taxpayers,
and this group generally has a high degree of expertise.

Typically, charges for a tax return with multiple deductions and credits
will cost $150-300. Several national companies provide tax preparation and
tax counseling services. Many operate only during the tax filing season but
a small number in larger urban areas are open year round. Fees charged by
these companies are slightly lower than the fees typically charged by CPAs
and Enrolled Agents.

Some parents may not be able to afford fees charged by professional tax
preparers, who generally seek payment in advance. An option for lower income
clients is the Volunteer Income Tax Assistance (VITA) program. However,
because of broad range in skills and expertise of volunteers, caution is
recommended. Some large cities have one or more VITA programs that offer
professional level services. A university accounting department or the local
legal services program may be able to help you identify a high quality VITA
program.

Disputes with the IRS

Disputes with the IRS are relatively rare; less than 1.5 percent of all
individual income tax returns are subject to an IRS audit. However, if the
IRS questions your return, and you feel an IRS agent is not responding
properly, contact the Taxpayer Advocate for assistance -- toll-free: (877)
777-4778. Low Income Taxpayer Clinics are another source of help. The IRS
funds more than 100 clinics to represent lower income taxpayers in disputes
with the IRS or state revenue departments. Clinics assist taxpayers with
income under 250 percent of the poverty level -- about $49,000 for a family
of four. Some clinics, especially those attached to law schools, will
represent higher income families. Information on the nearest clinic can be
obtained from the general IRS toll-free inquiry number: (800) 829-1040.
Families above this income level should call their county or state bar
association.

Final Thoughts

This guide offers a brief summary of some, but not all, of the potential tax
benefits that may be available to you. You should obtain copies of the IRS
publications cited above and discuss with your tax advisor whether these
benefits apply to you. Again, you should not rely on this guide alone to
determine whether you should claim any of the tax benefits reviewed here.

(c) 2006 Charles and Helen Schwab Foundation Created: 01/12/2006



[Non-text portions of this message have been removed]