Tax Tips for Caregivers

This information has been culled from the following sources:

CNN Money
A Place for Mom
ElderCare Link

This is for informational purposes only.  You should be sure to check with an accountant or the IRS when you are preparing your tax return.  Tax laws are complicated and ever changing.

The AARP also offers free assistance and tax tips for seniors through its Tax-Aide program.

If you are supporting an elderly parent, you may qualify for some tax benefits from the U.S. government.  These benefits may include claiming your parent as a dependent on your tax return or deducting the contributions you made toward their medical expenses and care.  In order to take advantage of these tax credits, you must first be aware of what benefits might be available to you and then determine if you qualify.

Dependency Deductions:

These are the qualifications for claiming your parent as a dependent:

  • The taxpayer must provide more than 50% of the parent’s support costs.
  • The parent must live with the taxpayer all year or, if they live on their own or in assisted living, they may still qualify for dependent status if the other qualifications are met.
  • The parent’s gross income for the year must be less than $3,700.  This income does not include income from non-social security or disability payments.
  • The parent must not file a joint return for the year, unless to claim a refund of taxes withheld.
  • The parent must be a U.S. citizen, a U.S. national, or a resident of the U.S., Canada or Mexico.

Note:  If your parent doesn’t qualify as a dependent, you cannot claim a dependency deduction, but you may be able to claim his or her medical expenses.

Medical deduction:

  • Medical costs can include a range of expenditures, including dental treatments, the cost of transportation needed to get to a medical appointment, health insurance premiums, and qualified long-term care services.
  • 7.5% rule – The 7.5% rule says you can only deduct medical expenses—for both yourself and your loved ones—if these costs exceed 7.5% of your adjusted gross income.

Multiple support agreement

In the case of multiple siblings giving support for a parent, as long as a sibling provides at least 10% of the care and the combined support of all siblings makes up half of the parent’s annual expenses, the parent could be claimed as a dependent by one sibling and that sibling taking the exemption would need to file Form 2120, Multiple Support Declaration, and have all the other siblings sign the form claiming they will not take the exemption on their own tax return.

Long-term care services

Long-term care medical expenses—including diagnostic, preventive, therapeutic, curing, treating, mitigating, rehabilitative, and maintenance and personal care services—are deductible if the services are required by a chronically ill individual and a licensed health care practitioner prescribes the care.  An individual is chronically ill if unable to perform at least two of six activities of daily living, which are eating, toileting, transferring, bathing, dressing, and continence.  An individual who is cognitively impaired and requires substantial supervision is also considered chronically ill.

Nursing services performed in a nursing home, an assisted-living facility, or similar care facility, are also deductible expenses if the person is principally receiving care for medical reasons.

However, if a person is staying at a nursing home, an assisted-living facility, or similar care facility only for custodial reasons, only medical expenses are deductible; in this instance, meals and lodging are not deductible.  If your qualifying relative is staying at a nursing home, assisted-living facility, or similar care facility for custodial care, a staff member should be able to state what percentage of care received qualifies as a medical care.  Similarly, nursing services at performed at home are deductible expenses.  If the patient is chronically ill, certain maintenance and personal care services are also deductible.

Long-term care insurance

Senior citizens and caregivers should be aware that premiums paid for qualified long-term care insurance contracts are also deductible medical expenses.  According to the IRS, the contract must:

  • be guaranteed renewable;
  • not provide a cash surrender value;
  • not pay costs that are covered by Medicare;
  • provide that refunds, other than refunds upon death, surrender, or cancellation of the contract, and dividends are used only to reduce future premiums or increase medical benefits.

Documentation is important.

Keep careful records and receipts for any items you plan to deduct on your tax return.

Use flexible spending accounts.

Flexible spending accounts (FSA) allow you to put aside pretax dollars to use for medical expenses.  Total up your out-of-pocket costs for the previous year to get an estimate of how much you can expect to spend.  The trick is not to put more money in an FSA than you plan to use for the entire year.  It is a “use it” or “lose it” plan.

Many state governments also offer tax credits and deductions for caregivers on state income tax forms, so it pays to know your individual state’s rules.

By nature, tax rules are complex.  It’s important to consult a tax attorney or accountant versed in elder care tax issues about your specific situation before finalizing your taxes.