If you're paying all or part of the cost of caring for a parent or another relative, you may qualify for some federal tax breaks. And who couldn't use the extra money?
Just make sure to outline all your costs and get someone to help you with your taxes, says Bonnie Speedy, vice president, AARP Foundation Tax-Aide, which offers free tax help from volunteers for people with low and moderate incomes, in conjunction with the IRS. AARP Foundation Tax-Aide has over 5,000 sites nationwide.
As the April tax filing deadline approaches, here are six ways family caregivers can save money on their taxes.
1. How does a relative qualify to become a dependent on your tax return?
Relatives are eligible to become a dependent on a caregiver's tax return if their total income is less than $3,900 a year in 2013, excluding nontaxable Social Security and disability payments, and if the caregiver provided more than 50 percent of the relative's support. If those criteria are met, caregivers can take a $3,900 tax exemption for each dependent. However, a word of caution is in order. Pensions, interest on bank accounts, dividends and withdrawals from retirement plans are counted as income. (The cap on income rises to $3,950 for 2014). By the way, most relatives don't have to live in your home to be considered your dependent.
2. When can a caregiver claim a tax benefit for a dependent's medical costs?
If you claim a relative (a parent, spouse, step-parent, grandparent, sister, cousin, aunt or in-law, for example) as your dependent, you can claim medical deductions if you're providing more than 50 percent of their support and if your total medical costs represented more than 10 percent of your adjusted gross income in 2013. You must meet the threshold on both counts. If the taxpayer is age 65 or older, the threshold is reduced from 10 percent to 7.5 percent.
3. Are caregiver tax deductions limited to just relatives?
No. Non-relatives could also qualify but only if they are part of the caregiver's household for the entire tax year.
4. What other kinds of dependent expenses are deductible?
The cost for food, housing, medical care, clothing, transportation and even bathroom modifications that are required for medical reasons can qualify for tax deductions. The IRS allows caregivers to deduct the costs not covered by a health care plan for a relative's hospitalization or for out-of-pocket costs for prescription drugs, dental care, copays, deductibles, ambulances, bandages, eyeglasses and certain long-term care services. Other items include acupuncture, adapters to TV sets and telephones for those who are hearing impaired, smoking cessation programs, weight-loss programs (if it's part of a treatment for a specific disease or condition) and wigs if hair loss is because of a medical condition or treatment. Keep all your records to prove these expenses in the event of a tax audit.
If a caregiver works but pays for care for a relative who can't be left alone, those costs may generate a tax credit, Speedy says.
5. What happens when more than one sibling wants to take the parent as a dependent on their tax form?
If more than one sibling is sharing the cost of the parent's upkeep, only one can claim the parent as a dependent.
6. Can caregivers use their flexible spending accounts to pay for a relative's eligible medical expenses?
Yes, a caregiver's tax-free flex account may be used to cover expenses for both dependent and independent relatives — as long as you're responsible for more than 50 percent of their support. The FSA is a tax-advantaged account that allows an employee to set aside a portion of earnings to pay for qualified medical expenses. Caps for FSAs were typically set by employers over the years. A $2,500 federal cap was in place for 2013. What’s new: The IRS, if permitted by your employer, now allows an annual carryover of unused funds of up to $500 for 2014, but only for a period not to exceed 2 months, 15 days.
As more boomers take on caregiving responsibilities for their aging relatives, it's important to understand the tax ramifications — and benefits — of their financial support, Speedy says.
"That's what our [Tax-Aide] volunteers are trained to do — look at the shift in the caregiving situations [for] tax implications."
Carole Fleck contributed to this report.
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