If you cared for an older relative last year, you might qualify for certain benefits on your 2013 tax return. And if you employed a paid caregiver, you may have certain tax responsibilities, as well.
Either way, now’s the time to start grappling with the ways the tax code could affect you.
There are plenty of folks in these positions. In a Pew Research survey last year, 36 percent of U.S. adults said they provided unpaid care for an adult relative or friend in the past year, up from 27 percent in 2010. And the number of paid personal care aides is expected to soar 49 percent between 2012 and 2022, to 1.8 million, growing at a much higher rate than the average profession, according to the Bureau of Labor Statistics.
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While it can take time to determine whether you’re eligible for caregiver’s tax benefits, your efforts could yield thousands of dollars in tax savings. At the same time, running afoul of certain tax rules could potentially cost you the same or even more in penalties.
Below are some factors to consider when preparing to file federal income taxes for 2013.
Determining Dependent Status
A good first step is to figure out whether you can claim your loved one as a dependent. For every qualified dependent on your tax return, you reduce your 2013 taxable income by $3,900 — and other benefits flow from that determination, including whether you’ll be able to deduct medical expenses.
An older person must meet the following criteria to qualify as a dependent:
The person must have had no more than $3,900 in gross income. This includes any income from pensions, taxable investments and the taxable portion of Social Security payments, if applicable. (Generally, only people with substantial other income must pay federal income taxes on Social Security benefits).
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Support You must have provided more than half of the person’s financial support. This includes fair market value for space in your home if, say, your mom lived with you and didn’t pay rent.
Relationship Parents meet the relationship requirement, as do stepparents and mothers and fathers-in-law, siblings and other close relatives. These relatives needn't have lived with you to be claimed as a dependent. For example, if your dad was in a care facility and met all the other criteria, then he could still qualify as a dependent.
A note for siblings sharing the care of a parent: Only one sibling can claim their parent as a dependent in any given year. The Internal Revenue Service defines “multiple support” as no one person providing more than 50 percent of the financial support, and everyone providing over 10 percent. (The multiple siblings together must have provided more than 50 percent of the parent’s support.)
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In this scenario, siblings often rotate annually who claims the parent, said Lawrence H. Carlton, a certified public accountant in Bedford, Mass.
A note for single caregivers: If you can’t claim your parent as a dependent based on the above criteria, you may still be able to claim head of household status based on your caregiving relationship, Carlton said. This filing status is more beneficial than the single filing status, in that it allows higher income thresholds for the lower tax brackets.
Deducting Medical Expenses
If you can claim your mother or father as a dependent, then you can write off their eligible medical expenses on your tax return. If they had income exceeding $3,900, but you still provided more than half of their financial support, you can also deduct their medical expenses.
Deducting medical expenses can yield big savings. To claim the write-off, you have to itemize your deductions on your tax return, rather than take the standard deduction.
Itemizers ages 65 and over can deduct the amount by which total medical expenses exceed 7.5 percent of adjusted gross income, while those 64 and under can deduct the amount by which those expenses exceed 10 percent of income. If you’re 64 or under, claim your parent as your dependent and plan to deduct both your and your parent’s eligible medical expenses, then the 10 percent threshold applies, Carlton said.
Eligible expenses include Medicare Part B and D premiums, as well as coinsurance or co-payments you owe the doctor. Many dental expenses can also be deducted, including dentures, a costly item that Medicare doesn’t cover. The same goes for hearing aids. You can also deduct the cost of household modifications that enabled an older person to live with you, such as ramps outside the house and grab bars in the shower.
Another big expense you may be able to deduct, either partially or in full, is the basic monthly cost for a nursing home or assisted living facility. To enable you to deduct the full cost, medical professionals need to have deemed your loved one “chronically ill.” The IRS defines this as either having severe cognitive impairments that require round-the-clock supervisory care or needing help with at least two activities of daily living, such as bathing, eating, dressing and using the toilet. Full basic monthly expenses can be deducted for those who meet these definitions. (One example of a charge that might be included in the monthly bill but couldn’t be deducted is personal grooming expenses such as haircuts or manicures.)
If your loved one doesn’t meet either definition of chronically ill, then only the portion of the monthly assisted living fee that went toward medical expenses can be deducted. The facility should be able to give you a breakdown of the bill. For more information on medical deductions overall, see IRS Publication 502
Employing Caregiving Help
If you hired a caregiver to help with your loved one, you’re considered an employer. Anyone who paid a caregiver employee more than $1,800 in 2013 should have withheld Social Security, Medicare, federal and state income taxes from the caregiver’s salary each pay period. They also needed to contribute employment taxes, matching the employee’s Social Security and Medicare taxes and paying unemployment taxes. (There are payroll services that will handle this for you for a fee.)
If you paid a caregiver less than $1,800 last year — say you needed one-time assistance to help your parent recover from a fall — you have no responsibilities to report or withhold, said Stephanie Breedlove, vice president of Care.com HomePay
, a tax payroll management and support firm.
If you hired a caregiver through an agency, double check that the agency was the caregiver’s employer and as such will handle payroll for you. Beware agencies that call their caregivers “independent contractors,” Breedlove said. This is illegal, as the IRS stipulates that anyone who works in a home is an employee
, she noted.
Taxes for Family Caregivers
The rules are different when family members decide to pay one member to care for an older relative. You don’t need to withdraw Social Security and Medicare taxes from the paycheck of a family member, and the family doesn’t have to pay unemployment taxes. However, you do need to pay income taxes on those wages at the end of the year, and the family caregiver has to declare the income, Breedlove said.
Payments to a family member are considered wages no matter how they’re labeled. For example, a family could call the monthly payment a rental stipend or a car payment stipend. One exception is health premiums: If a family directly pays the health insurance premiums for a family caregiver, those payments aren’t taxable to either party, Breedlove said.
What happens if you employed someone in 2013, but didn’t know these rules?
Families that didn’t pay their household employees on the books in 2013 can become “compliant in arrears,” Breedlove said. To do that, you pay a lump sum to the IRS for 2013 federal employment taxes and you also need to file quarterly returns with state employment tax payments (these can be filed together for the year). Penalties and interest will be assessed, although you can apply to have them waived.
Household employers who fail to report their employees’ income face back taxes along with penalties and interest. But compliance reaps benefits beyond avoiding these penalties, Breedlove said: Abiding by the rules shows the caregiver that you’re treating the relationship professionally, and that generally leads to greater employee satisfaction and longer tenure.
Elizabeth O'Brien is a retirement healthcare reporter for MarketWatch. Contact her at Elizabeth.O'Brien@dowjones.com
This article is reprinted with permission from MarketWatch.com. © 2015 Dow, Jones & Co., Inc. All Rights Reserved.