Caring for an elderly relative can be rewarding, but incredibly difficult – as well as expensive. However, it may be possible to recoup some of the costs through income tax savings.
There are three general approaches to tax savings on elder care costs – declaring your elderly relative as a dependent to receive an exemption, taking medical deductions that can be itemized, and claiming a dependent care credit that can be subtracted directly from the taxes you owe.
First, you must determine if your elderly relative qualifies as a dependent. Full details are listed in IRS Publication 501, "Exemptions, Standard Deductions, and Filing Information," but the primary criteria are that they must be a relative, you must be providing over half of their support, and their gross 2015 income must be less than $4,000.
The definition of relatives includes stepparents and in-laws. They do not have to live with you to meet the requirement as a dependent, but deductions change if they are in a long-term care facility or nursing home.
To calculate support levels and income requirements, you must consider income sources from your elderly relative such as dividends from investments, although Social Security income is excluded. If they live with you, you must consider percentages of your mortgage, utilities, transportation, and other household expenses when calculating your economic support.
If you determine that your relative can be claimed as a dependent, you can add them as an exemption on your tax forms. If not, you have two possible avenues:
- Multiple Support – If more than one person is supporting the elderly relative and the group covers more than 50% of the costs, one of you can claim your elderly relative as a dependent if they contribute at least 10% of the support. The others must sign a form agreeing not to also claim the relative as a dependent for that year.
- Itemized Medical Expenses – You can still deduct medical and dental expenses even when your elderly relative is not a dependent, if all other criteria but the income requirement is met. There is a large list of potential medical expenses, including insurance premiums and elements of nursing and long-term care. Consult IRS Publication 502, "Medical and Dental Expenses," to see what qualifies.
You can only deduct these expenses if the costs exceed 10% of your Adjusted Gross Income (AGI), or 7.5% of your AGI if you or your spouse were born January 2nd 1951 or earlier.
The dependent care credit allows tax breaks on home care and elder care costs that are necessary for you and your spouse to be able to work. The credit covers up to 35% of expenses with a $3,000 expense limit (thus $1,050 maximum credit). It can cover expenses allowing you to look for work, but to claim the credit you will need to have earned income during the year (this also applies to your spouse).
These expenses cannot be devoted to both medical care deductions and the Dependent Care Credit; however, you can devote home care costs toward the Dependent Care credit and other medical expenses toward the medical care deductions. Without the home care costs included in medical deductions, you may not reach the 10% criteria. Do the math to see which approach works best for you.
Elder care situations can be complex, and it is usually wise to consult with a tax professional. With some assistance, you can find the best path to help you simultaneously care for your elderly relative and save money – a win-win situation.