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Caring for aging relatives or family members with special needs can be tough on your finances. But you may qualify for federal or state-level tax breaks to offset some expenses.
On average, Americans providing unpaid care for another adult spend 28 hours per week on their duties, according to a Fidelity Investments study, and roughly 1 in 5 have skipped work opportunities, such as promotions or offers.
What’s worse, nearly 80% of caregivers have out-of-pocket costs, averaging $7,242 per year, AARP reports, including housing, medical bills and more.
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“The burden is really falling on women in their 50s and 60s,” said certified financial planner Nadine Burns, president and CEO of A New Path Financial in Ann Arbor, Michigan.
And many families cut assistance from outside workers during the pandemic to reduce the spread of the virus, said Burns, who cares for her 83-year-old mother living 90 minutes away.
But some caretakers may qualify for federal and state tax breaks, financial experts say.
Claim a dependent
Some federal write-offs hinge on an aging relative’s status with the IRS. Their loved one must be a “qualifying relative,” meaning they are a dependent on the caretaker’s tax return.
A qualifying relative must earn less than $4,300 for the year, and their caregiver needs to provide more than half of support, such as rent, food, transportation and more. They also must live with the caretaker full-time or meet a relationship test.
Tax write-offs
Caretakers often miss write-offs for what they spend on an aging relative’s medical expenses, said enrolled agent Adam Markowitz, vice president at Howard L Markowitz PA, CPA in Leesburg, Florida.
They may claim a tax break for a dependent’s unreimbursed medical expenses that exceed 7.5% of their adjusted gross income, assuming they itemize deductions.
For example, if the caretaker’s adjusted gross income is $100,000, they may deduct anything above the first $7,500 they spend on qualified medical expenses.
It can be really easy to get over the 7.5% threshold without even realizing it.
Adam Markowitz
Vice president at Howard L Markowitz PA, CPA
“It can be really easy to get over the 7.5% threshold without even realizing it,” he said. “Especially if you add in your medical expenses and your kids’ expenses.”
Another write-off, the child and dependent care tax credit, may offer some relief for those shelling out the money for adult daycare or similar costs while they work. Congress boosted the credit for 2021 to 50% of expenses, up to $8,000 per dependent, capped at $16,000.
“That is, prospectively, a very very big deal,” Markowitz said.
Caretakers may also be eligible for a separate $500 dependent credit, provided they fall below the income thresholds. They may also explore their workplace’s dependent care flexible spending account benefits.
The caretaker may also qualify for the $1,400 stimulus payment if they didn’t claim their elderly relative as a dependent in 2020, assuming they meet the income requirements, Markowitz said.
For example, let’s say an elderly parent was on their own in 2020 and received the $1,400 stimulus payment in March 2021. If they moved into their daughter’s home shortly after, their daughter may also qualify for the $1,400 credit when filing their 2021 tax return, he said.
Caretakers on the cusp may explore ways to reduce their adjusted gross income, such as contributions to an individual retirement account or health savings account before the tax deadline.
Moreover, depending on where someone lives, there may also be state tax breaks available, Markowitz said. But every place is different, so it’s best to rely on a tax professional for guidance.
“Mileage may vary on the state level,” he added.
However, if an aging relative isn’t a dependent, there may be fewer opportunities, Burns, from A New Path Financial, said.
“I’m not finding a lot [in the tax code] that I can use to help my mom,” she said.
Pending legislation
President Joe Biden proposed $400 billion in Medicaid funding for home and community-based care as part of the American Jobs Plan.
While the House Democrats’ spending package included $150 billion in funding for these programs, the future of Build Back Better is unclear.
House and Senate Democrats in June introduced bills supporting Biden’s plans.
