Taxes and Caregiving: What You Can Do
Updated: Feb 25
I was talking with a friend the other day who is an unpaid caregiver to her mother who is in the late stages of Alzheimer’s. She expressed that she wishes there were tax credits available to people like her who are dealing with the financial burden of caring for a loved one. I am pursuing a degree in finance and accounting, and I currently work with the accounting team of a publicly-traded American company, but I still found myself unable to assist her in identifying beneficial tax treatment that she could take advantage of. I knew there was a chance that her mother may qualify as a dependent other than a child, which comes with a $500 tax credit, but I wasn’t sure which criteria she needed to meet for this qualification. Since having this conversation, I have done some research and consulted with other accounting professionals to try to find information that may be helpful for family caregivers. I found that unfortunately, there aren’t many opportunities for caregivers to receive preferable tax treatment, but there are some that I would like to highlight.
As a general piece of tax advice, please note that tax credits are more beneficial than tax deductions. A tax credit is a decrease in your tax liability, whereas a tax deduction decreases your taxable income. For example, a $100 credit reduces your tax bill by $100, whereas a $100 tax deduction for someone in the 24% tax bracket reduces your tax bill by 24% of $100, which is $24.
I was correct that an elderly parent can be considered for the $500 nonrefundable credit, assuming they meet the criteria to qualify as a dependent. To qualify as a dependent, the person must meet legal residency, income, dependence, living arrangement, and special spousal consideration requirements, and the taxpayer must meet non-dependence requirements. Listed below are the details of these requirements, and the IRS also provides this online tool to assist in determining if your loved one qualifies as your dependent.
To satisfy the legal residency requirement, the person who is going to be a dependent must be a US citizen, US national, or a legal US resident, and they must be able to present a valid identification number. This identification number can be a social security number, an individual taxpayer identification number, or an adoption taxpayer identification number.
The person’s gross income cannot exceed $4,200.
If the person is not a close relative, they must live with you for the entire year. Generally speaking, most relatives except cousins are considered to be close relatives.
The person must pay less than half of their own living expenses. You can split the living expenses that you cover for your loved one with as many people as necessary; however, you must cover more than 10% of them yourself to claim the person as a dependent. This is referred to as a multiple support agreement.
You can only claim your spouse as a dependent if the spouse does not file a joint return with you or if the spouse files a return only to get a refund of income tax withheld and does not claim any other credits or deductions.
You can only claim a dependent if you are not the dependent of another taxpayer.
Single taxpayers or married taxpayers who live separately from their spouse may be able to file as head of household if they claim an elderly loved one as a dependent. If you are eligible to do this, you should, because it will raise your standard deduction from $12,200 to $18,350. If the loved one you are claiming is anyone other than your parent, then they will need to live in your residence to file as head of household. If you are caring for your parent, you can file as head of household even if the parent doesn't live with you, as long as you pay for over half of their cost of living. You should be aware that adding a loved one as your dependent makes them part of your household, which can have implications on Medicaid eligibility and the cost of health insurance purchased through the Affordable Care Act marketplace. You should discuss your specific situation with the appropriate authorities before making these changes. Medicaid is managed at the state level, and you can look up your state’s contact information here. Questions about the Affordable Care Act marketplace can be answered here.
The Child and Dependent Care Credit is based on the amount of money being spent to care for your loved one or loved ones. The taxpayer can claim a portion of up to $3,000 in caregiving costs for one person and up to $6,000 for two or more. The loved one that you are a caregiver for does not necessarily need to qualify as your dependent under the IRS definition of the term. The credit can be applied for an individual who was physically or mentally incapable of self-care, lived with you for more than half of the year, and either: (a) was your dependent; or (b) could have been your dependent except that he or she received gross income of $4,200 or more, or filed a joint return, or you (or your spouse, if filing jointly) could have been claimed as a dependent on another taxpayer's 2019 return. This tool is useful for determining if you are eligible to claim the Child and Dependent Care Credit.
For a family who is battling an expensive disease like Alzheimer’s, total itemized deductions may exceed the standard deduction. If unreimbursed medical costs for qualified medical expenses for all dependents claimed totals more than 7.5% of your adjusted gross income for the year (this threshold will increase to 10% of AGI in 2020), these can be used as itemized deductions. IRS Publication 502 goes into detail regarding what is and isn’t deductible, but some examples that I thought were relevant to caregivers were activities for older people with special needs, adult daycare or a home health care worker if you work outside the house, assisted living costs when incurred for medical reasons, copayments and deductibles, eyeglasses, hearing aids, home and vehicle modifications for safety or mobility, prescribed medicines and equipment such as a cane or walker, and transportation for medical appointments or services. It should be noted that a medical bill can’t be deducted as a medical expense if it is paid using flexible spending accounts or health savings accounts. Qualifying long-term care insurance premiums paid during the tax year may also be able to be deducted up to a certain amount based on the age of the person the insurance policy covers. The amount that can be deducted rises each year with inflation, but in 2019 it was $420 for those aged 40 or younger, $790 for those aged 41 to 50, $1,580 for those aged 51 to 60, $4,220 for those aged 61 to 70, and $5,270 for those aged 71 or older. An insurance policy must be tax-qualified for premiums to be deductible, however, nearly all long-term care insurance policies sold today are. To check, look at the first page of the insurance contract for “This policy is intended to be a federally tax qualified long-term care insurance contract under Section 7702(B)(b) of the Internal Revenue Code of 1986, as amended.”
Although some credits and deductions do exist for caregivers, I have to say that I was disappointed in the lack of beneficial tax treatment that is available to them. The average cost of raising a child to adulthood is $233,610. This is less than what the final 5 years of life cost a family who is battling dementia. Despite this, the child tax credit is worth $2,000 and parents can also benefit from the child and dependent care credit mentioned above if the child has a chronic illness. I struggle to understand how parents can get a $2,000 credit but caregivers can only get a $500 credit, and that is assuming that their loved one qualifies as their dependent. With the aging population of the United States, it is up to us to urge elected representatives to fight for our caregivers. I see this as an opportunity for the Alzheimer’s Association of America, the American Cancer Society, and other organizations that exist to support people living with chronic illnesses and their families to work together to help get more money back into the pockets of caregivers. Chances are, the money will go right back to fighting the disease their loved one is living with, but maybe there will be enough left over for them to treat themselves with. We all know they deserve it.