Tips for Caregiver Tax Deductions
As
more baby boomers take on caregiving responsibilities for their aging
relatives, it is important to understand the tax ramifications—and benefits—of
their financial support. Some caregiving expenses may be tax deductible. Below
are some guidelines to help you better understand how these dedications work.
Be sure to consult with your tax advisor when considering whether these tax
benefits are appropriate for your situation.
How a relative
qualifies to become a dependent on your tax return - Relatives are
eligible to become a dependent on a caregiver's tax return if their total
income is less than $3,950 a year, excluding nontaxable Social Security and
disability payments, and if the caregiver provided more than 50% of the
relative's support. If those criteria are met, caregivers can take a $3,900 tax
exemption for each dependent. However, a word of caution is in order. Pensions,
interest on bank accounts, dividends and withdrawals from retirement plans are
counted as income. Note that most relatives do not have to live in your home to
be considered your dependent.
When a caregiver
can claim a tax benefit for a dependent's medical costs - If you claim a
relative (a parent, spouse, step-parent, grandparent, sister, cousin, aunt or
in-law, for example) as your dependent, you can claim medical deductions if you
are providing more than 50% of their support and if your total medical costs
represented more than 10% of your adjusted gross income. You must meet the
threshold on both counts. If the taxpayer is age 65 or older, the threshold is
reduced from 10% to 7.5%. Caregiver tax deductions are not necessarily limited
to just relatives. Non-relatives could also qualify, but only if they are part
of the caregiver's household for the entire tax year.
The kinds of
dependent expenses that are deductible - The cost for food, housing, medical
care, clothing, transportation and even bathroom modifications that are
required for medical reasons can qualify for tax deductions. The IRS allows
caregivers to deduct the costs not covered by a health care plan for a relative's
hospitalization or for out-of-pocket costs for prescription drugs, dental care,
copays, deductibles, ambulances, bandages, eyeglasses and certain long-term
care services. Other items include acupuncture, adapters to TV sets and
telephones for those who are hearing impaired, smoking cessation programs,
weight-loss programs (if it is part of a treatment for a specific disease or
condition) and wigs if hair loss is because of a medical condition or treatment.
Keep all your records to prove these expenses in the event of a tax audit. If a
caregiver works but pays for care for a relative who cannot be left alone,
those costs may generate a tax credit.
Multiple siblings
claiming a parent as a dependent on their tax form - If more than
one sibling is sharing the cost of the parent's upkeep, only one can claim the
parent as a dependent.
Caregivers can use
their flexible spending accounts to pay for a relative's eligible medical
expenses
- A caregiver's tax-free flexible spending account (FSA) may be used to cover
expenses for both dependent and non-dependent relatives — as long as you are
responsible for more than 50% of their support. The FSA is a tax-advantaged
account that allows an employee to set aside a portion of earnings to pay for
qualified medical expenses. Caps for FSAs were typically set by employers over
the years. A $2,500 federal cap is currently in place. The IRS, if permitted by
your employer, now allows an annual carryover of unused funds of up to $500,
but only for a period not to exceed 2 months.
Citations
D Cory Payne
Beehive Insurance Retirement Planning Services
302 West 5400 South #101
Murray, Utah 84107
801-685-6875 Direct
801-554-7797 Mobile
801-685-2899 Fax
