I was recently asked how much income a disabled child could earn and still be considered a dependent for taxes.
First, any child under the age of 24 (whether they are disabled or not), and if they are a full-time student, and are not married filing a joint return with their spouse, can be claimed as your dependent; no matter how much money they make. They must however, file their own tax return, and not claim the exemption for themselves. For this reason, it is often more beneficial for the parent to not claim the child but remember that any tuition credits follow the exemption so the one that claims the exemption would also claim the tuition credits regardless of who paid the tuition. That is why a good tax-preparer will always run some comparison scenarios to see how the entire family would benefit the most, come tax time.
Now, if your child is disabled, and is either over the age of 24, or no longer in school, you can still claim them as a dependent. For this to happen, your child must first meet two criteria: first, they cannot be gainfully employed – that does not mean they can’t work at all, but that the work they do would not be paid enough to sustain themselves, and you must still be providing over half of their financial support. Second, a board licensed Doctor must have determined that the child’s condition must have either lasted, or be expected to last for at least one year or more, or will result in the child’s death. That means that even a child who is temporarily disabled do to a car accident, or other trauma, can still be considered as disabled if that condition is expected to last a year or more.
Remember this is information for taxes only. If your child is receiving disability through the government or other agency they could loose that classification if they make to much money so check with the agency first before they are employed.
If your child is expected to out-live you, despite their disability, it is often beneficial to set up a Special Needs Trust. This is a specific kind of trust that normally holds any inheritance they would receive. The reason for this type of a trust is that when your child receives the money they can and often are taken off any government assistance such as Medicaid because they are no longer eligible. A Special Needs Trust can be set up in such a way as to ensure that they are still eligible, because the trust is designed to only pay for things not medially related or not covered by Medicaid or Medicare. This would ensure that normal non-medical expenses could be taken care of such as non-medial housing, hair-cuts, education and even basic living expenses such as groceries could be provided without being considered income for the child. Special Needs Trusts are also occasionally used to make sure that a child who is not disabled cannot spend their inheritance on things that the parent might consider frivolous or harmful to the child.
Let us help you with tax planning for a disabled child – give us a call and we can work with you and your attorney to make sure your child will be taken care of beyond your expectations.