If you're paying all or part of the cost of caring for a parent or another relative, you may qualify for some federal tax breaks if they qualify as your dependent.
As the April tax filing deadline approaches, here are five ways family caregivers can save money on their taxes.
1. How does a relative qualify to become a dependent on your tax return?
The highest dependency hurdle is the amount of income your older parent earns. A dependent parent cannot make more than the exemption amount.
Relatives are eligible to become a dependent on a caregiver's tax return if their total income was less than $4,000 a year in 2014, excluding nontaxable Social Security and disability payments, and if the caregiver provided more than 50 percent of the relative's support.
If those criteria are met, caregivers can take a tax exemption for each dependent. However, a word of caution is in order. Pensions, interest on bank accounts, dividends and withdrawals from retirement plans are counted as income.
By the way, most relatives don't have to live in your home to be considered your dependent but if more than one sibling is sharing the cost of the parent's upkeep, only one can claim the parent as a dependent.
2. When can a caregiver claim a tax benefit for a dependent's medical costs?
If you claim a relative (a parent, spouse, step-parent, grandparent, sister, cousin, aunt or in-law, for example) as your dependent, you can claim medical deductions if you're providing more than 50 percent of their support and if your total medical costs represented more than 10 percent of your adjusted gross income in 2015. You must meet the threshold on both counts. If the taxpayer is age 65 or older, the threshold is reduced from 10 percent to 7.5 percent.
3. Are caregiver tax deductions limited to just relatives?
No. Non-relatives could also qualify but only if they are part of the caregiver's household for the entire tax year.
4. What other kinds of dependent expenses are deductible?
The cost for food, housing, medical care, clothing, transportation and even bathroom modifications that are required for medical reasons can qualify for tax deductions. The IRS allows caregivers to deduct the costs not covered by a health care plan for a relative's hospitalization or for out-of-pocket costs for prescription drugs, dental care, copays, deductibles, ambulances, bandages, eyeglasses and certain long-term care services. Other items include acupuncture, adapters to TV sets and telephones for those who are hearing impaired, smoking cessation programs, weight-loss programs (if it's part of a treatment for a specific disease or condition) and wigs if hair loss is because of a medical condition or treatment. Keep all your records to prove these expenses in the event of a tax audit. If a caregiver works but pays for care for a relative who can't be left alone, those costs may generate a tax credit as well.
5. Can caregivers use their flexible spending accounts (FSAs or HSAs) to pay for a relative's eligible medical expenses?
Yes, a caregiver's tax-free flex account may be used to cover expenses for both dependent and non-dependent relatives — as long as you're responsible for more than 50 percent of their support.
As more boomers take on caregiving responsibilities for their aging relatives, it's important to understand the tax ramifications — and benefits — of their financial support. Just make sure to outline all your costs and get someone to help you with your taxes,
For additional help you can reach out to the AARP Foundation Tax-Aide which has over 5,000 sites nationwide.