Special Needs Tax Information

Courtesy of IN.gov

March 21, 2016

Indianapolis – Governor Mike Pence today signed into law the Achieving a Better Life Experience Act (Senate Enrolled Act 11), which creates a savings program for Hoosiers to better provide for their loved ones with special needs by allowing them to save money for disability-related costs without placing other benefits at risk. The bill is aimed at easing the financial strain faced by an individual with disabilities by making tax-free savings accounts available to cover qualified expenses such as education, housing, health care and transportation. The ABLE Act was included on the Governor’s 2016 legislative agenda and championed by State Treasurer Kelly Mitchell and Sen. Luke Kenley (R-Carmel).

“Hoosiers with disabilities face enormous financial hurdles and planning for the future becomes a daunting task,” said Governor Pence. “Today as we sign the ABLE Act into law, we open a financial door for individuals with disabilities and empower them to save in a way that enables them to experience life to its fullest.”

“I’m grateful today for the partnership of Governor Pence, lawmakers, stakeholders, and advocacy organizations who helped bring this important bill to fruition,” said Treasurer Mitchell. “The ABLE Act will give Hoosiers with disabilities the tools to invest in a brighter future. I was honored to spearhead this legislation and am especially proud today as the Governor signs this bill into law.”

The bill creates ABLE accounts that will allow individuals and their families to create a tax advantaged savings account that can be used for certain disability related expenses, such as education, housing, health care, and employment training. These accounts are structured similar to a College Choice 529 Direct Savings Plan and will enable families and individuals to save for qualified expenses without risking their eligibility for other relied upon benefit programs, such as Social Security and Medicaid.

The ABLE Act passed the Indiana General Assembly this legislative session with unanimous, bipartisan support. The bill was signed into law in a public ceremony held in the rotunda of the Indiana Statehouse.

ABLE Accounts

New tax-saving opportunities for certain individuals with disabilities

In December of 2014, President Obama signed the Stephen Beck, Jr., Achieving a Better Life Experience (ABLE) Act into law. The enactment of ABLE resulted from an eight-year campaign to gain approval for tax-free savings accounts to help individuals and families finance disability needs.

The ABLE Act mirrors the provision of a §529 plan (an account used to fund education) and can help families fund an account to ease the expensive burden of caring for someone with disabilities. Each state is responsible for establishing and maintaining an ABLE account. While each state is different and may tweak the logistics, here are some common components of the program:

  • Only one ABLE account can be established per individual.
  • Earnings grow tax-free.
  • Contributions from all family members is limited to $14,000.
  • ABLE accounts should generally not be counted for purposes of supplemental social security income, Medicaid or certain other federal programs.
  • Funds included in distributions that are not used for qualified expenses are subject to income tax as well as a 10% penalty.
  • Earnings are not taxable if used to pay for certain expenses such as housing, transportation, employment training and support, health and wellness, assistive technology and personal support services, legal fees, over­sight and monitoring, and funeral and burial costs.

Eligible individuals include those who become disabled before age 26 and either receive Social Security Disability Insurance (SSDI) or SSI, or those who file a disability certification under rules established by their state.

If a state does not establish and maintain its own qualified ABLE program, it may enter into a contract with another state in order to provide its residents with access to a qualified ABLE program.

It’s important to note that, similar to §529 plans, an ABLE account does not give you a tax deduction for federal tax purposes, but the income earned is not taxable.

If you have any questions about this opportunity, do not hesitate to contact us.

Summary of Potential Tax Deductions, Credits and Exemptions

We encourage you to work with your Storen Financial tax professional to see how these potential deductions, credits and exemptions might apply to your situation.


A taxpayer may claim a dependency exemption for a “qualifying child” or a “qualifying relative.” Sec. 152(c)(3) was amended in 2009 to say that age is not relevant in determining the dependency exemption of an individual who is permanently and totally disabled.

Some conditions must be met. An individual is considered permanently and totally disabled if he/she is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months (Sec. 22(e)(3)). A doctor must certify in writing that the individual is permanently and totally disabled.

Ask your tax professional to walk you through the conditions to the exemption to see if you qualify.


Education is not typically deductible as a medical expense. However, in the case of a disabled individual, the cost may be deductible.

In this case, the IRS makes the determination of whether the school qualifies for a medical care deduction, not the taxpayer or school. According to the IRS, “special schools: include those that:

  • Teach Braille to the blind and lip reading to the deaf;
  • Train the intellectually disabled;
  • Give personal daily attention to the student to improve the student’s low attention span;
  • Provide an environment in which intellectually or physically handicapped students can adjust to a normal competitive classroom situation; or
  • Design a special curriculum to accommodate the needs of handicapped children with IQ scores ranging from 50 to 75.

ONE EXPANSION: The IRS also expanded the definition to include tuition for dyslexic children and also ruled that a school that provides nonacademic training and support services designed to help an individual be successful in another academic or vocational school may be deemed a “special school.”


It’s best to seek advice about the tax deductions before you begin a project that might fall under this category. Several guidelines are in place including these listed below:

To get a current medical expense deduction for a capital expenditure:

  1. the cost must be reasonable in amount
  2. incurred out of medical necessity
  3. for primary use by the individual requiring medical care
  4. made primarily for the medical care of the taxpayer, the taxpayer’s spouse, and/or the taxpayer’s dependents.

The IRS also describes two categories, each with its own guidelines:

  1. expenditures improving the taxpayer’s residence while also providing medical care
    *Capital expenditures in this category are deductible only to the extent that the cost exceeds the increase in the property’s fair market value as a result of the capital expenditure.

  2. expenditures removing structural barriers in the home of an individual with physical limitations (for instance widening doorways)
    *Expenditures incurred in the second category are fully deductible since there is no perceived increase in the property’s value as a result of removing a physical barrier.

Other potential tax considerations to discuss with your preparer include:

  • Deductions Attending Conferences
  • Impairment Related Work Expenditures
  • Earned Income Tax Credit
  • Medical travel and transportation
  • Credit for special needs adoption expenses

(These can vary by year; please check with your tax professional for up-to-date figures.)

For an up to date look at ABLE legislation by state, please click this link.

IRS Bulletin regarding ABLE ACT (updated June 2015)

IRS Bulletin regarding ABLE ACT (December 2014)

Special Needs Trusts Tax Filing
Special Needs Trusts can be complicated, so make sure you understand your tax filing and reporting requirements. Please consult your tax professional for assistance.

IRS Form 1041

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