Tax breaks for caring for an aging family member

Those who care for a family member who qualifies as a dependent may be entitled to deduct medical expenses.

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Putting a loved one in a nursing facility has always been a difficult choice for many clients. In the wake of the COVID-19 pandemic, even more clients are viewing this choice only as the last resort. The pandemic spread rampantly through nursing homes, creating significant — and largely justified — fears for those seeking long-term care for loved ones. The result has been a renewed interest in in-home care options.

For many, that means providing care for their loved ones in their own homes and funding home health aides who can help with medical care and with everyday activities such as cooking and cleaning.

While coordinating in-home care for a loved one can be a challenge, clients should be advised that a number of valuable tax benefits exist to help clients offset the cost of care.

Does the individual qualify as a dependent/?

Many federal tax breaks depend on whether the person receiving care qualifies as the caregiver’s dependent. If your client is caring for a family member who qualifies as a dependent, the client may be entitled to deduct the dependent’s medical expenses and claim other valuable tax benefits.

To qualify as a dependent, the person receiving the care must have gross income that doesn’t exceed $4,300 (in 2021; the amount is adjusted for inflation each year) and can’t file a joint return unless the return is filed only to receive a tax refund (and no taxes are owed). But Social Security benefits aren’t included. Most types of investment income, including traditional retirement account distributions, will be included in calculating gross income.

This income test is important. With proper tax planning, tax-free sources of income (such as a Roth account) can be leveraged to reduce the person’s taxable income. It may also be possible to use a qualified charitable distribution (QCD) to satisfy required minimum distribution requirements while minimizing taxable income.

In addition to satisfying the income test, the client must provide at least half of the person’s support for the year — considering housing, food, clothing, transportation, education, recreation and other necessities. 

In some situations, more than one caregiver may provide support for the individual, but no single person provides 50% of the support. For example, siblings might agree to pool their resources to support a loved one.

When each party provides at least 10% of the dependent’s support and the combined amount of support is at least 50%, only one caregiver can claim the person as a dependent. According to IRS Publication 501, the parties providing support must sign a Form 2120 “Multiple Support Agreement” that outlines who will claim dependency for the tax year in question. 

Finally, to qualify as a dependent, the person must be (1) a full-time resident of the caregiver’s household or (2) a relative, which the IRS defines to include only a parent, stepparent, parent-in-law, grandparent, great-grandparent, aunt or uncle.

Tax breaks for dependent care

Clients should remember that the actual dependency exemption was suspended for 2018 to 2025 under the 2017 tax reform legislation. 

The client can still, however, deduct a dependent’s medical expenses if those expenses exceed 7.5% of the client’s gross income (the threshold was reduced from 10% to 7.5%). The client will have to itemize to claim the medical expense deduction — meaning that the client’s itemized deductions will have to exceed the standard deduction for the plan to make sense. Itemized deductions include state and local taxes up to $10,000, charitable contributions, etc.

The dependent’s medical expenses can be added together with those incurred by the client, a spouse and other dependents (the person claiming the dependency exemption should make sure to pay all medical expenses directly to the medical provider).

If the person qualifies as a dependent, the client may also be entitled to the child and dependent care tax credit. The dependent care tax credit provides a tax credit to offset the cost of qualifying work-related dependent care expenses. A dependent who is a child must be under age 13 to qualify, but the age restriction doesn’t apply to other qualifying dependents. 

Qualifying expenses can include the cost of physically caring for a dependent who can’t be left home alone while the client works. They also include household expenses, such as hiring someone to help with cooking and cleaning, if the expenses are primarily for the benefit of the dependent while the client goes to work.

For 2021 only, the dependent care tax credit is fully refundable. The maximum credit percentage was increased from 35% to 50% of qualifying dependent care expenses (the credit phases down to 20% for taxpayers with income between $125,000 and $183,000).

Keep detailed records of expenses

Clients who opt to explore in-home care options for their loved ones should remember the valuable tax deductions and credits associated with providing care to a dependent — and be advised to keep detailed records because a surprisingly wide range of expenses qualify for the medical and dependent care deductions.

Robert Bloink, Esq., LL.M., has taught at the Texas A&M University School of Law and the Thomas Jefferson School of Law; in the past decade, Bloink has initiated $2B+ in insurance & alternative asset class portfolios, and previously served as a senior attorney in the IRS Office of Chief Counsel for the Large- and Mid-Sized Business Division. Bloink is also the co-author of Tax Facts, a reference solution that helps to answer critical tax questions and provides the latest tax developments.

William Byrnes, Esq., LL.M., CWM, is an executive professor and associate dean of special projects at the Texas A&M University School of Law. A pioneer of online legal education, he also is the author or co-author of 20 tax books and legal treatises. Byrnes is also the co-author of Tax Facts, a reference solution that helps to answer critical tax questions and provides the latest tax developments.

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