Having elderly relatives move into the homes of their children, nieces, nephews, etc. is occurring more regularly, regardless of your background, income, age or any other moniker. Elder family members are living longer and this makes the decision to have them live with you, a choice that could affect you for several years to come.
Caring for an elderly individual can sometimes prove to be burdensome in many aspects of your life. Because the decision to do so is generally made from the heart, the tax aspects are rarely considered. Fortunately, the tax law may provide some financial relief via tax benefits for taking care of an elderly individual.
You may claim an exemption for the cared-for individual if they qualify as your dependent. To qualify, (a) you must provide more than 50% of the individual's support costs, (b) they must either live with you and/or be related, (c) they must not have gross income over the exemption amount ($3,950 for 2014 & $3,900 for 2013), (d) they must not file a joint tax return for the year, and (e) they must be a U.S. citizen or a resident of the U.S., Canada, or Mexico. If the support test ((a), above) can only be met by a group (several children, for example, combining resources to support a parent), a Multiple Support Declaration, Form 2120, can be filed to grant one of the group the exemption, subject to certain conditions.
If the individual qualifies as your dependent, you can include any medical expenses you incur for them along with your own when determining your medical deduction. If they do not qualify as your dependent because of the gross income or joint return test ((c) and (d), above), you can still include these medical costs with your own. The definition of deductible medical expenses includes the cost of qualified long-term care services required by a chronically ill individual and the eligible long-term care insurance premiums of that individual. The standard adjusted gross income (AGI) limitations for medical expenses would still apply. Most people who itemize their deductions can claim deductions for unreimbursed medical expenses, those which are not covered by health insurance, that exceed 10% of their AGI. Previously, the law permitted deductions for unreimbursed expenses over 7.5% of their AGI.
Though, it would only apply if the cared-for individual was claiming medical expenses on their personal tax return, there is a temporary exemption for individuals age 65 and older until December 31, 2016. If a taxpayer is 65 years or older, they may continue to deduct total medical expenses that exceed 7.5% of their AGI through 2016. If they are married and only one of the couple is age 65 or older, they may still deduct total medical expenses that exceed 7.5% of their AGI. This exemption is temporary. Beginning January 1, 2017, the 10% threshold will apply to all taxpayers, including those over 65. Because of the disparity between the AGI phase-out percentages, an analysis may be needed to determine the most tax advantageous approach to take.
If you aren't married, you may qualify for "head of household" status by virtue of the individual you're caring for. If the person you're caring for (a) lives in your household, (b) you cover more than half the household costs, (c) they qualify as your dependent, and (d) they are a relative, you can claim the more tax advantageous head of household filing status. If the person you're caring for is your parent, they need not live with you, as long as you provide more than half of their household costs and they qualify as your dependent. Head of household filing status has a higher standard deduction and lower tax rates than filing as single.
Dependent care credit
If the cared-for individual qualifies as your dependent, lives with you, and physically or mentally cannot take care of himself, you may qualify for the dependent care credit for costs you incur for his care to enable you and your spouse to work. Both you and your spouse must have earned income to qualify for the dependent care credit and you may qualify for a credit of between 20-35% of the maximum qualified expenses allowable ($3,000 per qualifying person or $6,000 for two or more qualifying persons), even if you have a sizable AGI, since there is no AGI ceiling for this credit.
The Tax Warriors® at Drucker & Scaccetti are here to assist you at all stages of life. And, if we can help ease the financial concerns of taking care of an elderly relative, Click “Ask a Tax Warrior” below to contact one of our highly skilled consultants regarding this or any other tax-related matter.