In the United States today it seems as though there is no end to the different rules and regulations that govern the tax system. Unfortunately, for seniors and their caregivers, these rules and regulations can be even more complex as there are specialty laws that apply directly to seniors and those providing them with home care. As a familial care provider for a senior adult, it is important to understand these tax regulations and to keep them in mind when filing taxes. Ultimately, it is best to discuss tax breaks and options with an accountant or tax attorney, but this general overview can help seniors and their loved ones get started building the base of information they need to make smart decisions.
Caregiver Support Qualifications
Familial caregivers can receive a variety of tax incentives if their care situation meets certain IRS rules. A senior can be claimed as a dependent by their caregiver if they fall under the following qualifications:
- The senior must be a spouse, relative or dependent of the caregiver. This includes being a parent, stepparent, mother or father-in-law or an individual who has lived in the household for a whole year.
- The senior must be a United States citizen or resident of the U.S., Mexico or Canada.
- The caregiver isn't being claimed as a dependent by another taxpayer.
- The senior is not filing a joint tax return with a spouse.
- The senior's joint income for the year is less than $4,150, typically excluding Social Security income.
- The caregiver provides more than half of the financial support for the senior for food, medical costs, transportation and housing.
Once a caregiver is certain that their situation qualifies for the IRS dependency test, they can start creating an itemized deduction of relevant expenses, including medical expenses. Medical expenses are often some of the most significant costs faced by senior caregivers today. They constitute one of the biggest categories of expenses that must be calculated when tax season rolls around. The first thing that senior caregivers need to do is to have a clear understanding of what medical expenses technically are. According to the IRS, medical expenses include:
"the costs of diagnosis, cure, mitigation, treatment or prevention of diseases, and the costs for treatments affecting any part or function of the body."
Both seniors and their qualifying caregivers can claim deductions on anything that falls within this category and is an out-of-pocket expense. This includes the cost of transportation to and from medical appointments, dental care, health insurance premiums and extended care services. The IRS has a full list of all specific types of care that qualify for deductions.
The IRS also stipulates that seniors can only deduct medical expenses that exceed 10% of that person's adjusted gross income. If the individual or the spouse is 65 years or older, then that amount equals 7.5% of adjusted gross income.
On the other hand, if a caregiver pays for more than 50% of their relative's care, they can make deductions. First, the senior needs to have less than $4,150 per year in gross income and cannot be filing a joint tax return. If the senior does not meet these qualifications, then the caregiver cannot claim that they are a dependent and get the coordinating deductions, but they can still claim their medical expenses.
For many families, the role of caregiver is quite complicated. There may be multiple individuals that care for a senior parent. In cases where multiple individuals act as caregivers, a document known as a multiple support declaration can be filed to grant the exemption to a single family member. However, this can still be a rather complex situation, and may require the advice of a professional accountant or tax advisor.
Long-Term Care Insurance
In some instances, the premiums that seniors and/or their caregivers pay for qualified long-term care insurance can qualify as deductible medical expenses. However, the insurance must meet certain IRS standards first. This includes having an insurance contract that is guaranteed as renewable.
Seniors must also not provide a cash surrender value with their insurance contract and not pay costs that are covered by Medicare with their insurance. In order to ensure this insurance qualifies as a deductible medical expense, the senior or caregiver also needs to prove that refunds (other than refunds due to cancellation of contract, death or surrender) and dividends are only used to reduce premiums in the future or to increase the individual's medical benefits.
In addition to these long-term care insurance benefits, many individual states also provide their caregivers with specialty deductions and credits that may provide them with additional tax breaks.
Long-Term Medical Expenses
In certain situations, medical expenses related to long-term care are deductible if these expenses are required by a chronically ill individual. Their patient care plan needs to be prescribed by a licensed healthcare practitioner. These long-term care expenses include preventative and diagnostic care, therapeutic care, and expenses related to curing, treating, rehabilitating and mitigating a chronic illness. Seniors and their caregivers can also write off maintenance care and personal care services.
For a senior to be deemed chronically ill they must be unable to perform two of the following daily living activities on their own:
- Using the restroom
A senior with cognitive challenges who needs substantial supervision to live on their own also falls under the umbrella of being chronically ill.
For seniors who are receiving services from an assisted living facility or nursing home and need this care primarily for medical reasons, care costs may also be deductible. It is important to note that seniors who are in assisted living communities or nursing homes just for custodial purposes will not qualify for deductions. Also lodging costs and meals are not deductible expenses.
These tax tips can go a long way in ensuring that seniors and their family members can take advantage of the tax incentives that are available for today's senior community.