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.
See also: Find an AARP Foundation Tax-Aide site near you.
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 they earned 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 that criteria is 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, your relative doesn'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. That 7.5 percent threshold rises to 10 percent in 2013 2013 if you’re under age 65, or 7.5 percent for those over age 65. You must meet the threshold on both counts.
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 all 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 will 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?
You can file a multiple support agreement on form 2120 with your tax return if more than one sibling is sharing the cost of the parent's upkeep. As an alternative, experts say, you may want to consider creating a written agreement with your sibling that would allow each of you to take the dependent deduction every other year.
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 at least 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 now allows an annual carryover of unused funds up to $500 for 2014 if your employer allows that.
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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