Potential Tax Benefits Associated with the Tuition for Special Needs Students

By Jonathan C. Wolnik and Susan C. Stone

Taxpayers with a basic working knowledge of their returns understand that qualified unreimbursed medical expenses may be reported on Schedule A of their IRS Form 1040, assuming the taxpayer elects itemized deductions instead of the standard deduction.  The actual itemized deduction for medical expenses, of course, remains limited to certain adjusted gross income (“AGI”) thresholds.  Unfortunately, because of the math behind such thresholds, the taxpayer may be required to incur a significant amount of medical expenses before obtaining any tax benefits associated with the itemized deduction.  Regardless, parents of special needs children should be aware of potential tax benefits associated with their qualified tuition payments to schools providing care to students diagnosed with learning difficulties such as dyslexia or attention deficit hyper-activity disorder.

The IRS has published guidance relating to a taxpayer’s dependent who has been diagnosed with various learning challenges to such a degree that specialized schooling is required.  To substantiate any deduction claimed, it is critical that the child have been diagnosed with a learning disability by a physician and that the child then be enrolled in a specialized school.  Tuition for such a school may be reported as a medical expense on Schedule A for as long as the child maintains enrollment and continues to be diagnosed with the disability.  Internal Revenue Code Section 213 permits taxpayers to deduct amounts paid for tuition in these circumstances, subject to the AGI limitation.  Other potentially deductible amounts include costs related to the diagnosis, cure, mitigation, treatment, and prevention of the child’s affliction.  Specialized education for children with dyslexia or attention deficit disorders fall under this definition and therefore costs associated with their education may constitute a potential itemized deduction.

The educational program must also meet specific criteria to be deductible.  The school must be specifically geared toward helping the student overcome or live with their disability.  Therefore, general or routine educational programs will not qualify for this contemplated tax treatment.  The specialized school need not employ physicians, but must have professional staff competent to design and supervise a curriculum that also provides medical care to the child.  Further, the child must be enrolled in the school for the principal reason of managing or overcoming their disability.  Ordinary education received must be incidental to the specialized programs offered to the disabled child.  Missing any of these qualifications in the child’s educational program may jeopardize the deduction.

Special classes offered to challenged-students in a standard public or private school also will not qualify.  It is also important to distinguish specialized schools from reform or behavioral correction facilities as the latter, likewise, do not qualify for tax benefits.  The right team of lawyers with an understanding of both special education programs and tax law can help guide you to make the best decision for your child while taking advantage of any related tax benefits.