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Tax Tips for Caregivers: 5 Ways to Save When Caring for Elderly Parents

Finances | March 16, 2023

Mother and daughter learning about tax deductions for caregivers.

As a family caregiver, you are well aware of the tasks and duties you are now responsible for. While you may have known the time commitment, you may not have expected it to be so costly.

The average family caregiver spends about $7,200 a year on household, medical, and other costs related to caring for a loved one. That’s a lot, so we wanted to make your life easier by giving you everything you need to know about federal caregiver tax credits and deductions that apply directly or indirectly to caregiving costs.

Of course, we’re not tax experts, so it’s best to consult with a financial professional before filing your tax return if you have questions regarding your eligibility for the credits and deductions we mention below. However, sharing these five tax tips for caregivers can help you know where to look if you’re trying to save some money while supporting your elderly parents.

Claiming Parents as a Dependent

One potential way to save on your taxes is to claim your aging parent as a dependent. Having dependents can help you reduce your taxable income or claim a tax credit. However, there are specific rules that dictate whether or not you can claim a parent as a dependent.

The IRS allows caregivers to claim their parent as a dependent as long as they can pass certain requirements. That means that you and your parent must pass the following tests:

  • You (and your spouse if filing jointly) are not dependents for another taxpayer.
  • Your parent, if married, doesn’t file a joint return, unless your parent and their spouse file a joint return only to claim a refund of income tax withheld or estimated tax paid.
  • Your parent is a U.S. citizen, U.S. national, U.S. resident alien, or a resident of Canada or Mexico.
  • You paid more than half of your parent’s support for the calendar year.
  • Your parent’s gross income for the 2022 tax year was less than $4,400 (amount subject to change per year).
  • Your parent isn’t a qualifying child of another taxpayer.
  • If your parent is your foster parent, they must have lived with you all year in your main home and as a member of your household.

Head of Household Status

Another potential way to maximize your tax return is to file as head of household. This tax tip is only available to certain people, as the IRS allows you to become head of household if you meet the following requirements:

  • You’re unmarried or considered unmarried on the last day of the year.
  • You may claim your parent as a dependent.
  • One of the following criteria is true:
    • You paid more than half of the cost of keeping up a home for you and your parent that served as the main home for both of you for more than half of the tax year.
    • You paid more than half the cost of keeping up a home for your parent that is your parent’s main home for the tax year, even if your parent did not live with you.

As long as you qualify, you are eligible for a standard deduction of $20,800 for tax year 2023. That’s an increase of $1,400 from 2022, which is a nice savings when it’s time to file your taxes.

Tax Deductions for Caregiver Expenses

It’s not uncommon for caregivers to end up spending their own money out of pocket to support their aging parents, which leads many people to ask a simple question – are caregiver expenses tax deductible?

Yes, certain expenses you incur for a dependent can result in extra deductions come tax time. However, not all expenses are eligible, and you must itemize your deductions in order to qualify. By taking the standard deduction, you will be unable to claim this additional tax break.

To qualify, your total itemized deductions – deductible medical expenses, state and local taxes, home mortgage interest, and charitable contributions – must be greater than your available standard deduction. Additionally, you can only deduct unreimbursed medical expenses that exceed 7.5% of your adjusted gross income (AGI).

For example, if your AGI is $100,000, the first $7,500 of qualified expenses (7.5% of $100,000) will not count. If you had $10,000 of unreimbursed medical expenses in 2022, you would be able to deduct $2,500 on your Schedule A form.

If you choose to itemize your deduction, the following medical expenses are a few of the eligible expenses that can be claimed:

  • Unreimbursed medical expenses (diagnosis, cure, mitigation, treatment, or prevention of disease)
  • Payments to doctors, surgeons, dentists, or other medical practitioners for a qualified expense
  • Prescriptions including insulin
  • Nursing assistance
  • Hospital care
  • Diagnostic, X-ray, and laboratory services
  • Qualified long-term care services
  • Eyeglasses, hearing aids, and wheelchairs
  • Guide dogs

There are additional expenses that you can claim for this deduction as well. Meanwhile, expenses for gym memberships, vitamins, cosmetic surgeries, insurance premiums, and nonprescription drugs tend to be ineligible for this tax deduction.

The medical expense deduction can be a great way to help cover medical costs, but it can be difficult to benefit from them unless you have a large amount of out-of-pocket costs due to the high standard deduction and the 7.5% AGI threshold requirement.

Caregiver Tax Credits

There are additional tax incentives to help ease expenses that you may be able to claim. Unlike a deduction, which lowers your taxable income, a tax credit will help directly reduce your bill when filing.

There are two tax credits that you may qualify for; the child and dependent care tax credit and the tax credit for other dependents.

The child and dependent care tax credit helps reimburse you for the cost of care for your parent while you (and your spouse, if filing jointly) can work full or part-time. Based on the amount you spend; you can claim up to $3,000 in caregiving costs for one person and $6,000 for two or more.

To receive this credit, you must meet the following qualifications:

  • Your parent must have lived with you for at least six months during the tax year you are filing.
  • They must qualify as a dependent or meet all other qualifications.
  • They must be physically or mentally incapable of caring for themselves.
  • You pay for a home care worker, adult day care, or additional assistance to help take care of your parent(s) while you work or seek employment.
  • If filing jointly, your partner must also be employed, a full-time student, or disabled.

If you qualify for the child and dependent care tax credit, you don’t have to itemize your deductions to claim it. To claim the credit, you’ll complete and attach Form 2441 to your individual tax return.

The second credit you may qualify for is the tax credit for other dependents. This credit allows you to claim up to $500 as a nonrefundable credit for parents in your care if you meet the following requirements:

  • Your parent is a U.S. citizen, U.S. national, or legal U.S. resident and has a valid identification number – a Social Security number or Individual Taxpayer Identification Number.
  • Your parent’s gross income is not greater than that tax year’s cutoff amount, which is $4,400 in 2022.
  • Your parent(s) has lived with you, and you pay for more than 50% of their living expenses.
  • You are not claimed as a dependent yourself.
  • Your parent(s) is not married, or if they are, they do not file a joint return with their spouse.

To help you determine if you qualify for either of these tax credits, the IRS put together an interactive tool to help you decide.

Health Savings Accounts and Flexible Spending Accounts

Tax incentives can oftentimes be difficult to fully utilize due to their requirements and the increased standard deduction. Luckily, there are additional ways to reimburse your expenses around tax season in the form of Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs).

HSAs and FSAs allow you to take money from your earnings before taxes are deducted and deposit it into a medical savings plan you can use to pay out-of-pocket health care costs for your parent.

The funds that you deposit into these accounts can be used to pay for your parent’s medical bills, copays, insurance deductibles, medical supplies, and even some treatments that your insurance does not cover. It is important to note that if you pay for a medical expense using an FSA or HSA, you cannot take a tax deduction for that bill.

To qualify for an HSA, you need to be on a high-deductible health plan. That means your plan must have a deductible of at least $1,400 for self-only coverage and $2,800 for family coverage.

FSAs are slightly different. An FSA is an employer-sponsored account that allows you and your employer to contribute through salary reduction to use for qualified medical expenses. If your employer offers an FSA, you decide how much of your salary you want to set aside and your take-home pay will be reduced by that amount.

The benefit of using an FSA is that you are not required to have a certain type of health insurance plan. Additionally, it is typical that you must use most or all the funds you contributed to your FSA during the year you made the contributions.

Where to Find Additional Caregiver Support?

Navigating the caregiving journey can feel overwhelming at times. That is why we are here to help provide resources, so you don’t have to do this alone.

At National Church Residences, we take an individual approach to support seniors trying to live healthier, more satisfying lives. Find out which senior living options are in your area or give us a call at 844-465-6063 to talk to one of our friendly staff members today.

 

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