The following article was adapted from AgingCare.com
"Tax Tips for Caregivers: Can I Claim my Parent as a Dependent?
By June A. Schroeder, RN, CFP
It isn’t just time, but money that most caregivers donate to help maintain the ones they love. I know. I did it for years following willingly in the footsteps of my mom who also did it for years. The financial toll is often insidious. You shop and include their groceries, pay for repairs and the gas for trips to the doctor, you lose time at work and pretty soon we’re talking big money. To compensate you cut back on vacations, cut or discontinue savings, don’t get your teeth cleaned or you may even take out loans to cover caregiving costs.
There are several options that might help you save money on your taxes:
Claim your aging parent as a dependent
Deduct your medical expenses
Use a dependent care credit
Open a reimbursement account at work
According to the first in depth study of such expenses released in November 2007 by the National Alliance for Caregiving and Evercare, a division of United Health Group, the annual out-of-pocket cost of elder caregiving is $5,531. Long distance caregivers spend about $3,000 more. These numbers are twice the previous estimates and are more than the average household spends on health care and entertainment combined.
For over a decade, there has been much talk but little action on periodically proposed national legislation to provide more tax relief in the form of tax credits or deductions for the more than 20% of Americans currently involved in caring for older relatives, spouses and friends. Both Presidents Clinton and Bush proposed a $3,000 tax credit to assist persons with long-term needs and the family members who care for them. The most recent Bill S#2267, Americans Giving Care to Elders Act, was introduced In November 2007, read twice and sent to committee. Caregiving is sure to become an issue in the upcoming presidential campaign, as evidenced by Hilary Clinton’s recently announced plan for caregiver relief. Until more relief comes along, it is important to understand and take advantage of the tax benefits that are available to you if you are supporting an elderly spouse, parent or relative.
Claim Your Parent as a Dependent on Your Taxes
The income of the person you are claiming cannot exceed the personal exemption of $3,400 (in 2007) excluding Social Security and tax exempt interest. They must be a relative or have lived with you for the past year, must be a resident of the U.S., Canada or Mexico, and not filed a joint tax return with a spouse. IRS Publication 501 gives details on dependency requirements, including caregiver income phase-out levels.
In addition, you must be providing over half of their financial support for food, housing, medical, transportation, etc. If the person lives with you, include a reasonable percentage of your mortgage, utilities and other household costs in determining your level of support. Those who are in an assisted living or long term care facility can qualify as dependents if the income and support levels are met.
Often more than one family member is involved in the support. The one who is providing more than 50% of the support is entitled to claim the dependent. Be sure everyone is on the same page so you don’t run into trouble with more than one person claiming the individual. Arranging to alternate years or establishing a Family Limited Partnership might options to consider.
Deduct Medical Expenses From Taxes
Medical expenses are deductible as an itemized deduction on Schedule A of the 1040 to the extent they exceed 7.5% of adjusted gross.
In the words of IRS Publication 502: “Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes. They also include dental expenses. Medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness. They do not include expenses that are merely beneficial to general health, such as vitamins or a vacation.
Medical expenses include the premiums you pay for insurance that covers the expenses of medical care, and the amounts you pay for transportation to get medical care. Medical expenses also include amounts paid for qualified long-term care services and limited amounts paid for any qualified long-term care insurance contract.”
If you buy equipment or make home improvements, they may be deductible IF they are for relief of sickness or disability not just convenience or transportation, i.e. ramps, railings, wheelchairs. You can also include in medical expenses what you pay for prescribed medicines and drugs. Long term care facility monthly fees attributable to medical expenses are also includable.
Keeping good records, including mileage and supplies, may allow you or your parent to qualify for some tax relief yearly or to plan ahead to consolidate expenses for another year. A strategy dubbed “doubling up” on deductible expenses uses the standard deduction one year and itemized deductions the next.
Dependent Care Credit
You may be able to claim this credit if you pay someone to care for your dependent or your spouse who is not able to care for him/herself. To qualify, you must pay these expenses so you can work or look for work. The credit can be up to 35% of your expenses. IRS Publication 503 contains full information and worksheets and also discusses the employment tax rules for household employers. Your state may be one that also provides tax credits or deductions which build on the federal credit.
Reimbursement Accounts
If you are working at a company that offers a plan that allows for pre-tax deduction of dependent care and/or health care expenses, you can use those dollars for items not eligible for the Medical Expense Deduction or for relief if you will not be able to itemize. Tax law changes have added non-prescription medications, like aspirin and cough medicine, to the list of reimbursable items. Some plans require you to “use it or lose it” each year while others allow a carry-over to the next year for unused funds. Be sure to check out the details and plan accordingly.
Caution: Tax Liability?
Having a formal agreement about caregiving in exchange for the family homestead or some other deferred benefit, might be construed as “taxable compensation” as evidenced by the 2003 federal court decision in United States vs. Dieter. Mary Dieter’s receipt of the home was treated as “taxable compensation for services rendered.” In another circumstance, if the care recipient goes on Medicaid, such an exchange could be considered an illegal divestiture. Understand the laws and plan accordingly.
In conclusion, if you don’t already, with a few adjustments, you may be able to qualify for some of the tax advantages listed in this article depending on your income level and situation. Furthermore, the state in which you live may offer benefits as well. Learn what you can and consult a qualified professional for planning and preparing your taxes.
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June Schroeder is a Certified Financial Planner (CFP®) with Liberty Financial Group in Wisconsin, and has been working in financial services since 1979. Schroeder is also an RN, having received her degree from UW-Milwaukee in 1969. She served for 7 years as the Director of Economic Security for the Wisconsin Nurses Association, making her uniquely qualified for her role as a certified financial planner. She has written extensively for local publications as well as CNBC.COM. She has taught courses and lectured nationally on financial planning for universities and colleges."
Eric Tinsley
George Slater
