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The Tax Benefits to Know When Caring for Your Elderly Parents

Mar 29, 2019 4 Min Read Karen Kroll

Key Takeaways

  • Tax benefits can offset some of the costs of caring for an adult relative.
  • Benefits include the dependent care credit and tax credit for other dependents.
  • Compare these benefits with the tax impact of the standard deduction.

 

Do you spend time taking your parent or another adult relative to doctor appointments, the grocery store; help them cook meals or manage their finances? If so, you're not alone.

At some point in their lives, about 17% of adults will provide care to an elderly parent, according to the Center for Retirement Research at Boston College. While caregiving can be a labor of love, it also can exact an emotional, physical, and financial toll. Caregivers devote an average of 77 hours, or about two weeks each month, to assisting their parents, according to a report from PDF opens in new window the center. A 2015 report from AARP PDF opens in new window estimated the economic value of this unpaid labor at about $470 billion in 2013.

Fortunately, the federal tax code includes several provisions that can help alleviate some of the financial strain of providing care to an adult relative, whether a parent, sibling, or grandparent.

 

 

Claiming an adult relative as a dependent

If you itemize your expenses on your tax return, you may be able to claim as a dependent an adult relative for whom you're providing care. That way, you could deduct their medical and dental expenses, use the dependent care credit, or apply a $500 tax credit for dependents other than children.

Your relative will need to pass several tests to determine if he or she is a “qualifying relative" who can be claimed as a dependent. For instance, the relative's gross income typically can't exceed $4,200 for 2019. One caveat: “this [limit] generally doesn't include exempt income, such as many Social Security benefits," says Donald Pedersen, a Shawano, Wisconsin-based shareholder with the accounting firm Kerber Rose. And, you must have paid more than half the annual cost of your relative's support, including food, lodging, and medical expenses.

Even if your relative is a “qualifying relative," you may claim an exemption only if he or she is a citizen, national, or resident alien of the United States.

A note for single filers: if you're caring for a qualified dependent, you may qualify for head of household status. This would increase your standard deduction from $12,200 to $18,350, and move you into more favorable tax brackets, Pedersen says. To qualify as a head of household, you must meet several tests. Among them: you must be unmarried or considered unmarried on the last day of the year.

 

Dependent care credit

If you pay another person or agency to watch a relative who's also a dependent so you can work or look for work, you may be able to claim the dependent care credit. You can claim up to $3,000 in expenses for one qualifying person or $6,000 for two or more qualifying people. The credit is a percentage of the dependent care expenses you incurred. The percentage varies depending on your income.

The government puts numerous rules around this credit. For instance, you (and your spouse, if you're joint filers) typically must have taxable earned income during the year. Also, the individual you pay for providing care must not be your spouse or someone you can claim as a dependent.

 

Deductions for medical and dental expenses

For 2019, you can deduct some unreimbursed medical and dental expenses that exceed 10% of your adjusted gross income. For many people, that's a high bar. However, this includes expenses paid for dependents, including health insurance premiums, and a portion of long-term care insurance premiums.

 

Credit for other dependents

There is a tax credit of up to $500 for each qualifying dependent, other than children. This credit is nonrefundable, says Steven J.J. Weisman, an attorney with a focus on estate planning. That is, it can reduce your tax bill, but it won't increase your refund, if you didn't owe taxes.

 

Using FSA for your dependents

If you have a flexible spending account (FSA) through your job, you can use it to pay for qualified medical expenses incurred by all dependent(s), with pre-tax money. The list of qualified medical expenses includes co-pays, deductibles, and dental and vision care.

 

Itemize or standard deduction?

When deciding whether to itemize and use these benefits, you'll want to compare the impact on your tax bill to simply taking the standard deduction. That's because the Tax Cuts and Jobs Act, signed in 2017, increased the standard deductions. For single filers, it jumped from $6,350 in 2017 to $12,000 in 2018. For joint filers, the standard deduction jumped from $12,700 to $24,000. In 2019, the standard deduction is $12,200 for single filers and $24,400 for joint filers.

Given these changes, chances are you may come out ahead by taking the standard deduction, rather than itemizing, even with the tax benefits available. That said, it's worth running the numbers. If you qualify for the tax benefits, they can make the job of caring for an older relative a bit easier.

 

What you can do next

Calculate how your tax bill changes if you itemize deductions or use the standard deduction. Generally, you'll want to use whichever approach lowers your taxable income the most. Please consult your tax and legal advisors regarding your particular circumstances.

 

Karen Kroll is an experienced freelance writer and editor, with a focus on corporate and consumer finance. Her articles have appeared in AARPBulletin.com, Bankrate.com, Business Finance, CFO, CreditCards.com, Global Finance, and many other publications

 

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