Recent legislation has made life just a little bit easier for parents in California and around the country who are raising children with developmental, mental or physical disabilities. The Tax Cut and Jobs Act of 2017, the Coronavirus Aid, Relief, and Economic Security Act of 2020 and the American Rescue Plan Act of 2021 expanded the tax deductions available to parents with special needs children and increased the amount they can contribute to their Flexible Spending Accounts.
The Tax Cut and Jobs Act increased standard deductions considerably, which means itemizing deductions for unreimbursed medical expenses may no longer be necessary for many parents. The standard deduction for 2023 is $13,850 for an individual and $27,700 for a couple. Tuition paid to special needs schools or independent schools with curriculums for neurologically disabled children are deductible, and so are fees paid to specialized tutors and special education programs for dyslexic children.
FSAs and trusts
Flexible Spending Accounts allow parents with special needs children to save money for unreimbursed medical expenses and lower their tax bills. In 2023, the maximum contribution that can be made to an FSA has been increased to $3,050. When withdrawals are made from a 401(k) account to pay for a special needs child’s deductible medical bills, parents do not have to pay the usual 10% penalty. Parents with special needs children have special estate planning needs. If parents are worried about losing access to means-tested programs like Supplemental Security Income or Medi-Cal, they could use trusts to maintain their eligibility and provide a way to pay for services or treatment that government programs do not provide.
Raising a special needs child is not easy, and lawmakers have demonstrated in recent years that they understand this and want help. Legislation passed during the Trump and Biden administrations allow parents with special needs children to deduct more of their expenses, pay more into their Flexible Spending Accounts and avoid penalties when they use retirement savings to pay for their children’s medical care.