Elder Care Tax Benefits

Christian Samara (Aug, 2017)

It's a great time to be alive. Thanks to advances in technology and modern medicine we are living longer than we ever have before, and that’s a good thing. After all, who doesn't want to spend more time with their loved ones? While living a longer life may bring about more countless joys, it can also result in more complications which can get expensive. Often times when the families of loved ones become caregivers, it places financial burdens on them.  It is important to know that there are many tax benefits associated with elder care, which can help relieve some financial stress come tax time. Together we will look at some of the most common and applicable tax benefits, as well as whether or not you qualify to get them. 

One of the most common tax benefits associated with elder care is claiming a "qualifying relative" as a dependent on your tax return. In order to be a qualifying relative the following four tests need to be satisfied:

  • "Not a Qualifying Child" test
  • "Member of Household and Relationship" test
  • "Gross Income" test
  • "Support" test 

For the first test the dependent cannot be your qualifying child or the qualifying child of another taxpayer.  The second "Member of Household and Relationship" test requires the qualifying relative to have lived with you for the full year, unless the relative is one of the following:

  • Your child, stepchild, foster child, or a descendant of any of them (for example, your grandchild). (A legally adopted child is considered your child.)
  • Your brother, sister, half-brother, half-sister, stepbrother, or stepsister.
  • Your father, mother, grandparent, or other direct ancestor, but not foster parent.
  • Your stepfather or stepmother.
  • A son or daughter of your brother or sister.
  • A son or daughter of your half-brother or half-sister.
  • A brother or sister of your father or mother.
  • Your son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.

The third "Gross Income" test states the qualifying relative must have gross income for the year of $4,050 or less. The fourth "Support" test states that you must have provided more than half of the total support for the qualifying relative you are trying to claim. In addition to these four tests, the qualifying relative cannot be claimed as a dependent by anyone else, cannot file a joint tax return, and must be a U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico. Assuming your relative qualifies, you may claim them as a dependent on your tax return receiving an additional exemption which will reduce your taxable income by $4,050 (subject to limitation) in 2017.

Another potential tax benefit related to elder care is using the medical expenses you paid on behalf of your loved ones as an itemized deduction on Schedule A of your tax return. The IRS allows you to deduct the medical expenses of yourself, your spouse, and any dependents. In order to claim the medical expenses of your dependents the person must have been your dependent either at the time the medical services were provided, or at the time they were paid for. The IRS provides an extensive list of medical expenses that can be deducted.  Some of the most common include:

  • Prescription drugs
  • Doctor visits
  • Eyeglasses
  • Hearing aids
  • Dentures
  • Insurance premiums
  • Medicare Part B and Part D premiums
  • Long-term care services
  • In-home health services
  • Nursing home and assisted living costs
  • Ambulance charges
  • Hospitalization
  • Surgeries
  • Therapy

It is even possible to deduct the cost of home improvement projects that are medical in nature, such as building a wheelchair ramp, widening doorways to accommodate wheelchairs, and installing lifts. When deducting medical expenses on Schedule A it is important to remember that only medical expenses in excess of 10% of your AGI are deductible.  For example, if your AGI is $100,000, only medical expense that exceed $10,000 will be deductible on Schedule A. This is important to keep in mind for caregivers who could be paying large hospital bills, nursing home bills, or costs for medical home renovations.

There are also a handful of tax credits available to caregivers.  One credit is taken on the federal Form 2441 Child and Dependent Care Expenses which is available to taxpayers who pay someone to care for their qualifying person enabling them (and their spouse if filing jointly) to work or actively look for work.  One benefit of the credit is that the specifications for a qualifying individual are not the same as they are for qualifying relatives.  An individual may be qualified for the credit even if they had gross income in excess of the exemption amount, file a joint return, or could have been claimed as a dependent on another taxpayer's return.  Depending on your AGI between 20-35% of the dependent care expenses (up to $3,000 for one qualifying person or $6,000 for two or more qualifying persons) can be taken as a credit as long as you had earned income, are not filing married separate, and paid a care provider who was not a dependent or relative.

New York State (NYS) also provides a child and dependent care credit for taxpayers who were eligible for the federal credit.  This is filed on New York Form IT-216 Claim for Child Care Credit.  Based on your NYS AGI the credit can range from 20-110% of the federal credit.  This is a fully refundable credit for full-year NYS residents.

Taxpayers who pay premiums for qualified long-term care insurance may also claim a NYS credit.  This credit is equal to 20% of the premiums paid during the tax year for you, your spouse, and any dependents claimed on your tax return.

Another NYS credit that may be available to you is applicable if you pay for a loved one to be cared for in a nursing home. The credit is equal to 6% of the base-rate portion of the assessment that you directly paid to the nursing home during the year.  Many nursing homes can provide you with the amount of assessment paid that is eligible for the credit.

If you or someone you know is a caregiver providing financial support for the care of their elderly loved ones, it is crucial to be aware of the potential tax benefits available, whether in the form of tax deductions, tax credits, or both.  Should you have any questions about the tax benefits associated with elder care and whether or not you may qualify to take them, please contact Dermody, Burke, and Brown to discuss it with your trusted tax adviser. 

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