It’s a fact of life. Americans are consistently living longer than ever before. It used to be that someone living to be 90 was a rarity. Today, it’s commonplace. And the longer we live, the higher the probability we’ll need care. Much of that care may be provided by family members.
According to the National Center for Biotechnology Information, 26 million Americans will provide care for a family member. And it’s not a short-term proposition. The National Study of Caregiving found that 70% of family caregivers will take care of that relative for 2 to 10 years.
Much of the care you give a loved one will be with daily living, but you may provide financial help as well. You may pay for in-home services for a parent such as basic housekeeping and meal preparation, nursing and medical services, some or all of assisted living.
You might provide care in your home or your relative’s home, paying some of the expenses while mom or dad, aunt or uncle, pay for food, utilities or other expenses out of their own resources. Whatever form of care you give, there are tax consequences and you need to be aware of the tax breaks available to caregivers.
Qualifying as a dependent
The person you are caring for may qualify as a dependent on your tax return if:
- They are a U.S. citizen.
- Their gross annual income is less than $4,300. Social Security benefits and tax-exempt interest are generally not included in the income test. Income from savings and investments are included.
- You provide more than half the support of the person you are caring for. Support includes things such as clothing, housing, education, medical expenses, recreation, and transportation. If the relative lives in your home, the fair market rental value of the housing is included as part of the support you provide.
- The loved one cannot file a joint tax return with another taxpayer unless the return is filed for the sole purpose of receiving a tax return, and they have no tax liability for the year the return is filed.
You need to keep records of the amount you spend caring for your relative to prove you are providing at least 50% of their care. You’ll find a list of all qualifying expenditures in IRS Publications 17 and 501.
Some relatives can be claimed as dependents, even if they don’t live with you. They include parents, step-parents, parents-in-law, grandparents, great-grandparents, aunts and uncles. To claim anyone else as a dependent, they must be a full-time member of the same household during the year.
But let’s say several siblings are providing support and none of you meet the 50% support test. It’s still possible for one of the siblings to claim the relative as a dependent. All siblings will have to sign IRS Form 2120, the Multiple Support Declaration. It identifies the person who can claim as a dependent the person being cared for. Each signer of the form must contribute at least 10% to that care and the sibling who claims mom or dad as a dependent files Form 2120 with their own tax return. But the deduction can be rotated among siblings each year by using the same process.
A taxpayer who can claim a relative as a dependent can deduct medical expenses paid on that person’s behalf. To make sure you receive a deduction for those expenses, you need to pay the medical providers directly rather than reimbursing your loved one. Then, at tax time, you add those medical expenses to the rest of your family’s medical costs. If you itemize, and the total medical expenses for the year exceed 7.5% of your adjusted gross income (AGI), you can deduct the amount above the 7.5% threshold.
When a multiple support agreement is in place, only the person claiming the relative as a dependent can claim the medical expenses and that person should pay all the medical costs as their portion of the agreement.
Often caregivers mistakenly think paying for doctor visits and medicine are the only medical expenses. It’s important to keep track of all expenses you pay for them. Don’t forget things like the cost of traveling to and from medical appointments and the pharmacy.
You might be able to claim the child and dependent care credit for expenses paid to care for the person while the caregiver goes to work. The credit is claimed by including Form 2441 with your income tax return.
If your employer offers a dependent care flexible spending account (FSA), you as the caregiver can elect to have salary contributed to the FSA tax-free. Then, the account can provide tax-free reimbursements for expenses you paid for your loved one.
Being a caregiver can be costly in both time and money. Learn what deductions are available to you to help ease your financial load.
This article is presented as information only and should not be considered financial, tax or legal advice.