Tax Credits and Deductions for Caregivers

By: Stacey Nickens

Caring for an elderly relative can be both rewarding and challenging. Spending extra time with a loved one may come with significant expenses, including care expenses. If you are responsible for financially caring for an elderly relative, you may be able to claim one of the below tax credits or deductions.

Credit for Other Dependents

Deductions lower your taxable income. However, credits directly lower your tax bill. Some caregivers will be able to claim the $500 “Credit for Other Dependents.” In order to claim this credit, you and your dependent must meet the following requirements:

  • Legal Residency: Your dependent must be a U.S. citizen, U.S. national, or legal U.S. resident. Your dependent must also have a valid identification number. A valid ID number could be a Social Security number, an Individual Taxpayer Identification Number, or an Adoption Taxpayer Identification Number.
  • Income: Your dependent’s income must be equal to or less than the threshold amount. In 2021, your dependent’s income must have been less than $4,300.
  • Dependence: Your loved one must live with you, and you must provide for more than 50% of your loved one’s living expenses. The IRS does still allow people with “multiple support agreements” to claim this credit. A multiple support agreement is when two or more people split the cost of caring for a dependent relative. Only one person who is financially supporting the relative can claim this credit, and that person must provide for at least 10% of the loved one’s living expenses. Furthermore, your loved one can only be claimed as a dependent on your return if you are the one claiming the credit.
  • Housing: Your dependent must have lived with you for the entirety of the tax year.
  • Married dependents: You can still claim your loved one as a dependent if they are married. You can only do so if your loved one does not file a joint return or only files a joint return in order to claim a refund on withheld income tax.

Head of Household Status
Claiming a relative as a dependent may allow you to file as Head of Household. You can do so if you are single, or living separately from your spouse, as long as a relative lived with you for at least half of the tax year. Filing as Head of Household would increase your standard deduction from $12,550 to $18,800 in 2021. However, if you are claiming a dependent as part of a multiple support agreement, you cannot file as Head of Household.

Medical Expense Deductions
If you are itemizing your deductions, you may be able to deduct some of your loved one’s unreimbursed medical costs. You can claim this deduction if the qualified medical expenses claimed on your return are greater than 7.5% of your adjusted gross income.

Some qualified medical expenses include:

  • Activities for elderly people with special needs
  • Acupuncture
  • Adult day care or home health care aid (if you work outside of the home)
  • Medically-necessary assisted living costs
  • Bandages
  • Copayments and deductibles
  • Glasses
  • Hearing aids
  • Medically-necessary home and vehicle modifications
  • Insulin
  • Physical therapy
  • Medicines and medical equipment
  • Transportation to medical appointments

If you paid for certain medical expenses with a flexible spending account (FSA) or a health savings account (HSA), you cannot deduct those expenses.

Child and Dependent Care Credit
The size of this credit is based on the amount of money you spent caring for your loved one. For the 2021 tax year, you claim up to $4,000 in costs incurred while caring for one person or $8,000 in costs incurred while caring for two or more people.

Despite what the credit’s name would suggest, your loved one need not be your dependent in order for you to claim this credit. However, you must meet the following requirements:

  • Housing: Your loved one must have lived with you for at least six months of the tax year.
  • Dependency: Your loved one must be your dependent. You can also claim this credit if your loved one is only excepted from being your dependent because their income exceeds $4,300 or they are filing a joint return with a spouse.
  • Incapacity: Your loved one cannot care for themselves mentally or physically.
  • Employment: You were required to pay for a day care program or home health worker such that you could work or look for work.
  • Spousal Requirements: If you are married, your spouse must also be employed, be a student, or be disabled in order for you to claim this credit.

To claim the above credits or deductions, it is helpful to keep detailed records of your loved one’s expenses and living arrangements. Reach out to the qualified Elm3 tax team if you would like assistance in navigating this process.

Source: AARP