Caring for a Relative? You Might Get Tax Breaks
Paying for an older person’s care could earn you deductions, but beware the pitfalls
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.
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:
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.