Caring for loved ones: 6 tax tips for caregivers

Adult grandson kissing his happy grandfather on the cheek while helping him ride a bike in the city.Image: Adult grandson kissing his happy grandfather on the cheek while helping him ride a bike in the city.

In a Nutshell

If you’re a caregiver for aging parents or other relatives, you may be able to claim your loved ones as dependents and take advantage of certain tax breaks. But there are limits on the caregiving expenses you’re allowed to deduct. Here’s what you should know.
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This article was fact-checked by our editors and Christina Taylor, MBA, senior manager of tax operations for Credit Karma.

When a loved one needs you to take care of them, stepping up may be the right thing to do, but it can also cost you a bundle.

A 2016 AARP study found that 78% of surveyed caregivers incurred out-of-pocket costs because of their caregiving activities. On average, family caregivers spent nearly $7,000 per year on caregiving, according to the study.

Given the high costs of caregiving, whether you’re taking care of an aging parent, grandparent or other person who needs help, you may be wondering if you can save some money on your taxes. Here are tax tips for caregivers that could help reduce your tax bill and make caregiving just a little bit easier.

  1. Those you take care of could be dependents
  2. Impact of tax reform
  3. Caregiving could qualify you for head-of-household status
  4. Tax tips for caregivers who cover costs
  5. Some expenses aren’t tax deductible
  6. Some disability benefits are taxable

1. Those you take care of could be dependents

Acting as a caregiver can take a toll on you, both personally and financially. The good news is that caring for a loved one could reduce your taxable income for 2017 by $4,050 — provided you meet income requirements and you’re eligible to claim a dependent exemption for that loved one.

If you provided a person with more than half their support in a year, they may qualify as your dependent for that year’s tax return. However, your relationship and the individual must meet certain tests.

  • The dependent must be a U.S. citizen, national or resident, or be a resident of Canada or Mexico.
  • If the person is a relative, they don’t have to live with you to qualify as a dependent, but they must meet other criteria.
  • If the person is not a relative, they must live with you for more than half the year, unless an exception applies.
  • The person must not be claimed as a dependent by anyone else, claim any dependents of their own, or claim their own personal exemption.
  • They must have a gross income of less than $4,050 per year.
  • The dependent can’t file a tax return as married filing jointly, unless they are filing only to claim a tax refund of income tax withheld or estimated tax payments made.

If the person you’re caring for is a parent, you have a bit more leeway in how these rules are applied.

“Parents can still qualify as dependents if the taxpayer maintained the parents in a separate residence, including assisted living and nursing homes,” says Mark Gianno, CPA and president of Gianno & Freda Inc. in Hyannis, Massachusetts. “Of course, you must pay more than half the cost of maintaining that separate residence.”

2. Impact of tax reform

Unfortunately, there’s also some bad news.

Recent tax reform eliminated personal exemptions, which includes dependent exemptions, starting with the 2018 tax year. You’ll no longer be able to claim a dependent exemption after 2017’s taxes are filed. But you could still benefit by claiming the person you care for as a dependent. If you’re eligible, you could get a new $500 credit for each qualifying relative you claim as a dependent in 2018.

“This is a nonrefundable credit, meaning that the $500 credit can be used to reduce taxes, but can’t be used to increase a refund to a taxpayer with no income tax liability,” Gianno says.

3. Caregiving could qualify you for head-of-household status

Claiming someone you’re caring for as a dependent might reduce your taxes in another way as well — by allowing you to change your tax filing status from single to head of household. The head-of-household status could afford you greater deductions. For example, under the new tax reform law, the standard deduction for heads of household is $6,000 more than the deduction for taxpayers filing single.

“Filing status won’t be affected by dependency if you’re married,” says Janis Orel, CPA and principal at Orel & Associates CPAs Inc.

But if you’re not married, qualifying the person you’re caring for as a dependent could allow you to claim head-of-household status instead of filing as single.

“Head-of-household status allows a larger standard deduction and more-favorable tax rates than single status,” Gianno says.

4. Tax tips for caregivers who cover costs

By claiming the people you’re caring for as dependents, you could also make yourself eligible for other tax breaks.

Medical expense deduction

You might be eligible for a medical expense deduction if you incur qualifying medical expenses for a dependent and your dependent’s medical bills, along with any of your own medical expenses, exceed 7.5% of your adjusted gross income. You’ll need to itemize deductions in order to claim dependent medical expenses, and the costs must be qualifying expenses.

The good news is that many of the types of costs you could face as a caregiver are considered qualifying medical expenses. For example, qualifying medical expenses could be any of the following:

  • Doctors’ fees
  • In-patient hospital or nursing home costs
  • Prescription drug costs
  • Hearing aids
  • Dentures
  • Prescription eyeglasses
  • Wheelchairs
  • Transportation costs
  • Long-term-care insurance premiums

“A portion of long-term-care premiums [paid for dependents] can be deductible, but that amount varies based on your age,” notes Micah Fraim, a CPA in Roanoke, Virginia.

For 2017, the deduction ranges from $410 if your dependent is 40 or younger to $5,110 for dependents 71 or older.

Child and dependent care credit

Finally, if you’re paying for the care of a spouse, or other dependent who’s physically or mentally incapable of self-care, you may also be eligible for the child and dependent care tax credit. This credit allows you to reduce your taxes based on a percentage of care costs, up to a maximum of $3,000 if you’re caring for one qualifying individual or $6,000 for the care of two or more.

To claim this credit, you must show you paid for the care of an incapable person so you could work or look for work. If you are (or were) working and received dependent care benefits that are excluded or deducted from your income, you’ll have to subtract the benefit amount from the applicable dollar limit.

5. Some expenses aren’t tax deductible

Unfortunately, not all the financial help you provide will entitle you to tax breaks. For example, if you move into a relative’s home to provide care, and contribute to paying the mortgage, you won’t be able to take a mortgage interest deduction unless you’re on the mortgage.

“The caretaker would have to show that they are the ‘legal or equitable owner’ — essentially having the benefits and burdens of homeownership to be eligible to take a mortgage interest deduction,” Fraim says.

As Cindy Hockenberry, Director of Tax Research and Government Relations at the National Association of Tax Professionals explains, this means “you can deduct the interest paid on a mortgage only if you make the payment and are liable for the debt.”

6. Some disability benefits are taxable

When looking at tax tips for caregivers, it’s also important to consider what will happen if you’re paid to be a caregiver. This can occur, for example, if an insurance company pays you for the care of a spouse who was permanently disabled or injured in an accident.

If you have to report care-payment income, you’ll do so on line 21 of Form 1040 under “Other income,” but you won’t have to pay self-employment tax unless you’re engaged in the business of providing caregiving services.

Bottom line

By claiming a person you care for as a dependent, you can reduce your taxes through the dependent exemption in 2017 and claim other credits and deductions going forward in 2018 and beyond. Make sure to find out if your loved one meets the criteria to qualify as a dependent so you can reduce the financial burden of caregiving by getting tax breaks.

Christina Taylor is senior manager of tax operations for Credit Karma. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She co-developed an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.

About the author: Christy Rakoczy Bieber is a full-time personal finance and legal writer. She is a graduate of UCLA School of Law and the University of Rochester. Christy was previously a college teacher with experience writing textbo… Read more.