Tackling Tax Season
Life is expensive. Being a caregiver can be another added expense to your monthly budget, even if a loved one has independent financial stability.
There are a variety of situations that a caregiver can find themselves in during this season’s tax time. The level of tax deduction you might be eligible for depends on the amount of care a caregiver is providing throughout the year. Some long-term costs such as transportation, insurance premiums and prescriptions can be deducted as medical expenses. For a caregiver to qualify for specific tax deductions or credits, the person being cared for must be a spouse, dependent, or qualifying relative. A qualifying relative includes any person who resided with the caregiver all year as a member of the household.
Caregivers must first know what will benefit them and then, make sure to meet with a qualified attorney or accountant who can guide them through the process come tax time. The major rule to remember is that expenses can only be deducted if they exceed 7.5 percent of a caregiver's adjusted gross income, which as a person ages, can add up fairly quick.
All or nothing
Is a loved one considered a dependent? This is the first question a caregiver must answer. There are a number of tax benefits available to a primary and even more for a live-in caregiver.
In order to qualify for a dependency deduction, a caregiver must be paying for more than 50 percent of the relative's support costs. (The gross income and joint return tests will tell if the person qualifies as a dependent. A loved one must not have a gross income in excess of $3,800 and cannot file a joint return. Social Security is normally excludable.)
An important thing for caregivers to know, though, is that even if the loved one does not meet the dependency requirements, a caregiver still has options to claim medical expenses (if they meet the 7.5 percent requirement).
The financial support provided which qualifies a caregiver for deductions includes food, housing, medical, transportation, etc. Long-term care medical expenses including diagnostic, preventive, therapeutic, curing, treating, mitigating, rehabilitative, and maintenance and personal care services.
If it's a live-in situation, a reasonable amount of the mortgage, utilities and other household costs will determine the level of support being provided.
To qualify as a dependent, however, a loved one does not have to live with a caregiver. If he or she is able to be in their own home, or in an assisted living/nursing facility, the costs a caregiver pays still can count toward the IRS support requirement for a dependent.
The same sentiment applies when a caregiver is paying for a loved one's care while they work, whether care is being received at home or a facility. Look at IRS Publication 503, Child and Dependent Care Expenses to research this topic further.
For live-in caregivers, another tip to remember is that many home modifications made specifically for a (dependent) loved one's ability to live in a home safely can be tax deductible. The installation of a wheelchair ramp, widening doorways, bathroom renovations, etc. can be considered. The amount allowed is the cost of the modification decreased by any increase to the value of a home.
A very common trend is for siblings to share the financial responsibility for a parent or other elderly family member. If a group of people is sharing the cost burden for a loved one, the person providing more than 50 percent of the support can claim the dependent.
A piece of advice professionals offer is for family members to discuss the situation ahead of time so everyone is on the same page come tax time.
If no caregiver pays that half of the support themselves, IRS Form 2120 explains how to handle multiple-support declarations.
If a caregiver has arranged for another person to be the primary caregiver, there are tax breaks available as well. Whether using a caregiving provider, or independent person, these expenses can be deductible.
Any costs with helping of daily activities such as dressing, eating, toileting, etc. can be counted as medical expenses if they add up to 7.5 percent of a caregiver's adjusted gross income. IRS Publication 502: Medical and Dental Expenses explains these in greater detail.
There are some things to be aware of, however, as a caregiver. First, whatever extent medical or long-term insurance covers these things, that level of care can't be deducted.
The loved one also must be chronically ill and a health care provider (licensed) has to actually prescribe a plan for care. Many people may want to arrange for the care on their own, but if their loved one is not monitored and care not prescribed, there is no tax benefit allowed.
Chronically ill is defined as when a person is unable to perform at least two of the six activities of daily living: eating, toileting, transferring, bathing, dressing or continence. Someone who has cognitive impairment and requires a good amount of supervision also meets that standard.
An idea worth noting
about situations where a loved one is living in a facility of some
sort is: if they are there ONLY for living, and not medically induced
reasons, only medical expenses are deductible. If they are living
there for primarily medical reasons, the service and housing expenses
count toward the total.
Tax rules are complex either way. It’s important for caregivers to consult a tax accountant to truly take advantage and have knowledge of the intricate tax laws.
Here are some tips, as offered by Michigan's Caregiver Resource Network:
Keep receipts for medical expenses, property taxes, charitable contributions, prior tax preparation expense, income, bank statements, etc.
A caregiver is already on limited time, so doing things last minute will increase chances of mistakes and missing potential credit and/or deductions available.
The IRS offers a plethora of free information to help educate caregivers on regulations, and provide tax forms. Teletax Service (1-800-829-4477) offers recorded messages and the IRS staffed help line is available at 1-800-829-1040. Information can also be found at www.irs.gov.
A caregiver must know the dependent guidelines, and make sure to take those credits when they can.
Local libraries and post offices carry tax forms and information. Many local organizations also offer free advice. Ask at your county or state aging resource center.
Many states offer a tate-specific deduction for caregivers. These guidelines change every year, so caregivers should contact their state to see what's available for them.
There are many qualified professionals well versed in caregiver tax benefits. The cost of utilizing them may well save caregiver money in the long run.
There are many scenarios that can arise with tax issues. Each family's situation will be unique and have individual considerations. However, with the rising cost of health care, it doesn't take long to spend a good sum of money. A caregiver may want to look into a Flexible Spending Account (FSA) or Health Savings Account (HSA) to help cover such expenses. These funds are becoming increasingly common among employers and employees alike.
Caregivers will only gain from taking advantage of tax benefits now, and knowing what's available for them as a loved one requires more care in years to come.
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Jennifer Bradley is a Staff Writer for Today's Caregiver Magazine, caregiver.com and the Caregiver Newsletter. You can subscribe to the magazine or receive their free newsletter by going to caregiver.com and signing up.