If you are caring for an elderly parent, likely the last things on your mind are federal tax breaks. However, there are three different ways, potentially all three in one year, for you to reduce your federal income tax. First, you may be eligible to claim a parent as a dependent on your tax return, thus getting a personal exemption for them. Second, you may also qualify for the Dependent Care Credit. Third, you may be allowed to claim as itemized deductions, medical expenses incurred for the care of a qualified parent.
For the 2016 tax year, the exemption deduction for each taxpayer, spouse, and dependent is $4,050. To claim someone as a dependent, they must be related to you, must not have income over $4,050, and rely on you for more than half of their financial support during the year. In-laws and step-parents are allowed as well. Gross income does not include Social Security. Unlike claiming a child as a dependent, it is not necessary that your elderly parent live with you. Some factors to consider in determining support include: fair market rent of the space they occupy, utilities, food, clothing, necessary equipment, doctor bills, prescriptions, supplemental Medicare coverage, recreation fees, and transportation. If you and other siblings collectively pay more than half of the parent’s total support and you pay at least 10% of that portion, you may also claim them; however, nobody else could do so in the same year.
In this situation, the Child and Dependent Care Credit is sometimes referred to as the Elderly Dependent Care Credit or the Aging Parent Tax Credit. If you file a joint return, both spouses must have earned income. Allowable expenses cannot be greater than the income of the lower-earning spouse. One filer must pay at least half of the qualifying person’s financial support. Requirements for the person in need of care include: the inability to physically and mentally care for him/herself, reside with the tax filer for at least half of the year, and receive less gross income than the personal exemption (currently $4,050). There is no relation requirement, nor is there an age restriction.
The tax return must identify a qualifying person by name and social security number, and also list the care provider’s name, address, and tax ID number. In-home care or adult day care costs are examples of allowed expenses, whereas nursing facility and assisted living residence fees are not. The intended purpose of care must be to free the taxpayer to enable them to work or actively search for a job while ensuring the well-being of the individual. Hiring someone to come into your home to provide the care may make you a “household employer”. In this case, you would be subject to pay Social Security, Medicare, and unemployment taxes for the employee. The caregiver cannot be your spouse or any other dependent you claim on your return.
The Elderly Dependent Care Credit cannot be claimed in conjunction with the medical expense itemized deduction for the same expenses. Typically it is most advantageous to apply the maximum ($3,000 for one individual and $6,000 for two or more) towards the credit on Form 2441 first, and the remainder as medical expenses on Schedule A. The credit reduces your taxes owed dollar for dollar, whereas a deduction reduces your taxable income. The credit is calculated based on 20-35% of the work-related care expenses depending on your Adjusted Gross Income. Itemized medical expenses are only deductible if they exceed 10% of adjusted gross income (7.5% threshold exists through December 31, 2016 if you or your spouse are 65 years or older by the end of the tax year). You can now deduct your elderly parent’s medical expenses on Schedule A, even if they do not meet the income requirement to be claimed as a dependent.
Please consult your tax professional at Ketel Thorstenson, LLP to see if you can benefit from any of these options for your loved one.