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North Carolina

July 29, 2011

Tax Credit for Children with Disabilities

During its 2011 legislative session, the General Assembly of North Carolina enacted an income tax credit that includes homeschool students with learning disabilities. Designated as House Bill 344 with Representative Paul Stam (Dist. 37) as its primary sponsor, the legislation creates a new tax credit for parents of children with special needs who choose to educate those children in a nonpublic school or in a public school at which tuition is charged. For homeschools, the credit is equal to the amount the taxpayer paid for special education and related services, not to exceed $3,000 per semester, up to two semesters a year (a maximum of $6,000 for a full academic or taxable year). The credit is non-refundable, but any unused portion of the credit may be carried forward for the succeeding three years.

To qualify for the tax credit, the taxpayer must be able to deduct a personal exemption for an “eligible dependent child.” An “eligible dependent child” is one who:

  1. Is a child with a disability as defined by North Carolina General Statutes 115C-106.3(1);
  2. Was determined to require an individualized education program (IEP) as defined by G.S. 115C-106.3(8);
  3. Receives special education or related services on a daily basis; and
  4. Is a child for whom the taxpayer is entitled to deduct a personal exemption under section 151(c) of the Internal Revenue Code for the taxable year.

For initial eligibility for the tax credit claimed by the parent, the child must have been enrolled in and attended a public school or received special education or related services through the public schools as a preschool child with a disability for at least the two preceding academic semesters. The new law is effective for tax years beginning January 1, 2011, and applies to semesters for which the credit is claimed beginning July 1, 2011. The initial eligibility requirement regarding public school involvement is changed from two academic semesters to one academic semester beginning January 1, 2016, and thereafter applies to semesters for which the credit is claimed beginning July 1, 2016. In order to maintain eligibility, the law requires all eligible dependent children to be reevaluated every three years by the local education agency (LEA) in order to verify that the child continues to be a child with a disability as defined by G.S. 115C-106.3(1).

A student would no longer be eligible if he or she:

  1. Was placed in a nonpublic school or facility by a public agency at public expense;
  2. Spent time enrolled as a full-time student in a postsecondary educational institution;
  3. Was 22 years or older during the entire semester; or
  4. Graduated from high school prior to the end of the semester.

The new law defines “special education” as specially designed instruction to meet the unique needs of a child with a disability. The term includes instruction in physical education and instruction conducted in a classroom, the home, a hospital, an institution and other settings. “Related services” means transportation and such developmental, corrective, and other supportive services as are required to assist a child with a disability to benefit from special education, and includes speech-language pathology and audiology services, interpreting services, psychological services, physical and occupational therapy, recreation, including therapeutic recreation, early identification and assessment of disabilities in children, counseling services, including rehabilitation counseling, orientation and mobility services, and medical services for diagnostic or evaluation purposes. Related services also include school health services and school nurse services, social work services in schools, and parent counseling and training.

Because of the eligibility requirement that the special needs child was previously enrolled in public school or received special education or related services through the public school as a preschool child, it is unlikely that many current homeschool parents will qualify for the tax credit. On the other hand, the new law encourages parents with a special needs child in public school to withdraw their child and begin homeschooling, knowing that the tax credit will provide funds for needed services. Hopefully, future legislation will make all homeschooling parents with a special needs child immediately eligible for the tax credit.