Jose Luis Pelaez Inc/Getty Images
En español | As a family caregiver, you went into the job knowing it would take much of your time. You may not have expected it to take quite so much of your money. Some 42 percent of family caregivers spend more than $5,000 on unreimbursed care for loved ones. Fortunately, there is some light at the end of the tax year: deductions and credits.
Top Option: Your Loved One Becomes Your Dependent
You can claim a $500 nonrefundable credit for dependents who do not qualify for the child tax credit, including dependents such as elderly parents. Unlike a deduction, which lowers your taxable income, a tax credit is deducted from the taxes you owe.
The Internal Revenue Service allows family caregivers to claim some individuals related by blood, marriage or adoption and even friends as dependents — if both parties meet the IRS requirements. If so, the caregiver can claim the dependent and the credit for other dependents on his or her federal tax return. A caution is that adding the dependent may impact your household health insurance costs if purchased through the Marketplace or if the dependent is eligible for Medicaid.
- Your loved one must be a U.S. citizen, U.S. national or resident of the U.S. and have a valid identification number (ATIN, ITIN or SSN). Your loved one can be a resident of Mexico or Canada and be your dependent, but you cannot claim the credit for other dependents for them.
- Your loved one's gross income cannot be greater than that year's cutoff amount ($4,150 for 2018).
- Gross income includes wages, gross business income, taxable* Social Security, unemployment income, royalties, honoraria, severance, sheltered work shop pay, gains from the sale of assets, dividends, rental income, interest and taxable withdrawals from regular IRAs, 401(k)s and other retirement accounts.
- Items not in gross income include nontaxable pensions, part of Social Security that is not taxable, nontaxable disability payments, Supplemental Security Income, public assistance, gifts and inheritances.
- You may claim a friend, honorary auntie or other unrelated beloved as a dependent but he or she must have lived with you the entire year.
- You live with your loved one and pay for more than 50 percent of your loved one's annual living expenses. This includes: lodging, food, clothing, medical and dental care, recreation, transportation and other necessities.
- Two or more people can split their relative's expenses, but only one person can claim the dependent if that person pays at least 10 percent of the relative's support costs. This is called a multiple support agreement.
- You can only claim a dependent if you are not a dependent of another taxpayer.
- You can claim a married loved if he or she does not file a joint return or files a joint return only to claim a refund of withholding.
Rules to file by:
- Keep detailed records. This may necessitate creating a log to show the dependent lived with you for at least half the year.
- Keep receipts and jot down all related expenses on a notepad, calendar or a log in your phone. This record will make sure you don't miss any allowable deductions and will be part of your documentation if you are audited.
Added bonus: Head of household status and a higher standard deduction
For the single taxpayer or married taxpayer that does not live with their spouse for the second half of the year: Adding a dependent who is related to you and lives with you bumps you up to head of household. The change in status means your 2018 standard deduction jumps to $18,000. However, personal exemptions are now reduced to $0.
Special rule for parents: You can claim your dependent parent and get head of household status even though he or she does not live with you. All other relatives must live with you at least half the year for you to receive head of household status.
If you use the multiple support agreement to claim your dependent, your dependent will not qualify you for head of household status.
To see how caregiving is transforming, visit AARP’s caregiving and technology series.
Deduct This! Dependent Medical Expenses
You can deduct the money you paid to cover your loved one's unreimbursed medical costs if the qualified medical expenses of everyone claimed on your taxes totals more than 7.5 percent of your adjusted gross income for 2018 AND your total itemized deductions are more than your standard deduction.
You will want to check IRS Publication 502 to see what is and isn't deductible. Here is a sampling of acceptable deductions:
- Copays and deductibles
- Accepted therapies not covered by insurance
- Physical therapy
- Hearing aids
- Assisted living charges when needed for medical reasons
- Prescribed medicines and equipment, such as a cane or walker
- Transportation to appointments or services
- Adult day care or in-home health care worker, if you are working
- Activities for older people with special needs
- Home and vehicle modifications needed for safety or mobility
- Cost of professional health aide during respite care
- Hotel near treatment center (up to $50 per night per person)
Not deductible: items and services that benefit the household.
Flexible spending accounts and health savings accounts
Flexible spending accounts (FSAs) and health savings accounts (HSAs) take money from your earnings before taxes are deducted and deposit it in a medical savings plan so you can pay out-of-pocket medical charges for yourself and dependents with untaxed dollars. You may use one of these accounts to pay for your loved one's medical bills, copays, insurance deductibles and legitimate treatments that are not covered by insurance. If you pay using an FSA or HSA, you may not also take the medical deduction on your taxes.
Child and dependent care tax credit
Oddly, given the name, this tax credit does not require that your loved one qualify as your dependent. Noteworthy:
- The person must be physically or mentally unable of caring for themselves and lived with you for more than six months.
- The person would have been a dependent except he or she had gross income higher than the allowed maximum ($4,150 in 2018), had filed a married filing jointly tax return or you yourself are a dependent.
- You pay a child or adult day care program or an in-home health worker to assist your loved one so that you can go to work or look for work. If you are married, your spouse must also work, be a student or be disabled to qualify for this credit.
Just make sure to outline all of your costs and get someone to help you with your taxes, says Lynnette Lee-Villanueva, vice president, AARP Foundation Tax-Aide, a free tax return preparation service, staffed by volunteers, for people who need the assistance with their taxes in conjunction with the IRS. AARP Foundation Tax-Aide has almost 5,000 sites nationwide.
*Some Social Security will become taxable when half of the Social Security received plus other income, including exempt interest income, exceeds $25,000 for a single tax payer or $32,000 for those filing jointly. There’s a special rule if you’re married, live with your spouse during the year and file separately from your spouse.
Originally published Dec. 15, 2017, this article was updated to reflect current tax laws.
More Financial Resources for Caregivers