While meeting with families who are considering homecare options, we're often asked if caregiving services are tax deductible. We found an article published by the Society of Senior Advisors that might answer some of your tax questions.
An www.AgingCare.com survey found that the majority of adult children who are responsible for paying for their elderly parent's care are financially unprepared to do so. Specifically, the survey found that 63 percent of caregivers have no plan for paying for a parent’s care, and 62 percent say that the costs of the parent’s care will negatively influence their capacity to financially plan for their own futures.
"With an estimated 34 million Americans providing care for older family members, the survey's results indicate a financial crisis in the making," says Joe Buckheit, Publisher of AgingCare.com, a website and online forum for family caregivers.
"Medicare only covers long-term care for a short time and only under strict rules. Medigap insurance helps, but does not cover all costs. The burden of paying for long-term care often rests with the family," Buckheit says. "The caregivers' lack of planning is impacting their own financial future."
Adult children are often paying out of their own pockets to provide for an aging parent. The AgingCare.com survey indicates that 34 percent are paying $300 or more a month for caregiving expenses such as medications, groceries, medical copayments and transportation. The survey shows that 54 percent have sacrificed spending money on themselves to pay for care of their loved one.
Criteria for benefitting from tax rules
www.Eldercareanswers.com notes five tests to determine whether one can claim a parent as a dependent. The person being claimed as a dependent:
However, adult children can benefit from understanding how tax rules provide some relief from this situation.
- Must be related to the person claiming them as a dependent. This includes in-laws.
- Must be a citizen or resident of the United States or a resident of Canada or Mexico.
- Must NOT file a joint return. If the person being claimed as a dependent is married, he or she must file separately. There is an exception if the person is filing jointly, but has no tax liability. If the person files a joint tax return solely to get a refund, one can claim him or her as a dependent.
- Must NOT have a gross income of a particular amount that is determined by the IRS. For 2011, that amount was $3,700 or more. Gross income does not include Social Security payments or other tax-exempt income.
- Must receive more than half of the support from the person claiming them as a dependent during the year (see below under “Determining level of support” for further guidance).
Determining level of support
Support includes money spent toward food, lodging, clothing, education, medical and dental care, recreation, transportation and similar necessities. If more than one person pays for these expenses, a Multiple Support Declaration (form 2021) can be filed to receive an exemption.
If the dependent lives with the taxpayer, a reasonable percentage of the mortgage, utilities and other household costs can be used to determine the level of support. However, a parent does not have to live with their child. When a parent is able to remain in his or her own house, in an assisted living facility or a nursing home, the costs paid for parental support at those locations count toward meeting the IRS requirement. Those who are in an assisted living or long-term care facility can qualify as dependents if the income and support levels are met.
What are deductible expenses?
Always check with a tax or financial professional to determine which expenses are allowable. Once a parent or dependent loved one meets the IRS’s dependency tests, certain expenses can be treated as tax write-offs. These include:
Medical –Medical costs must exceed 7.5 percent of the adjusted gross income of the individual filing the tax return. The dependent’s medical costs can be counted in that 7.5 percent. For example, if the taxpayer’s adjusted gross income is $50,000, medical costs must exceed $3,750.00 to be taken as a tax write-off.
The IRS says, "Medical expenses are the costs of diagnosis, cure, mitigation, treatment or prevention of diseases, and the costs for treatments affecting any part or function of the body." For more information on allowable medical expenses for tax deductions download Publication 502.
The taxpayer can deduct medical expenses for himself/herself, spouse and any dependents. Following are some of the items included in the definition of medical expenses:
- The cost of drugs that require a prescription. Insulin is deductible without a prescription.
- The cost of dental treatment, including x-rays, fillings and dentures.
- The cost of travel to medical appointments.
- Premiums paid for insurance policies that cover medical care are deductible, unless the premiums are paid with pretax dollars. Generally, the payroll tax paid for Medicare Part A is not deductible, but Medicare Part B premiums are deductible.
- Payments made for nursing services. An actual nurse does not need to perform the services as long as they are the kind generally performed by a nurse.
- The cost of long-term care, including housing, food and other personal costs, if chronically ill.
- The cost of meals and lodging at a hospital or similar institution if a principal reason for being there is to receive medical care. Not to exceed $50 for each night for each person.
- Costs for medical equipment installed in a house or improvements made to the home if the equipment or improvements are needed for medical care. If one makes an improvement, the deduction must be reduced by the increase in the property value.
- The portion of a lump-sum or “founders fee” payment to a retirement home that is for medical care. The agreement with the retirement home must require a specific fee as a condition for the home's promise to provide lifetime care that includes medical care.
Home modifications made to accommodate special conditions or disabilities may be deductible as medical expenses. Allowable expenses include, but are not limited to, a ramp leading to the door, grab bars in the tub or shower, handrails in hallways or stairs or special doorknobs for easy access.
Dependent care credit
Caregivers often need to hire someone to assist them with the care duties. The dependent care credit allows the taxpayer to deduct up to 35 percent of expenses for hiring care providers. IRS Publication 503offers complete information about the credit, and qualifying factors for dependent care.
Approximately 20 states also offer caregiver tax advantages above and beyond the federal ones. Check with the state’s tax agency or a qualified tax or financial professional to find the most beneficial path for each caregiving situation.