If you’ve become a caregiver for an aging parent and/or the financial power-of-attorney, you may have the options when it comes to filing their taxes or counting them as a dependent on your own taxes
As the United States Tax Code includes tens of thousands of regulations and is ever-changing, it would be impossible to stay on top of every regulation without the help of your own experienced tax professional. So, as the saying goes, “Trust, but verify.”
That being said, there are a number of things you can be doing right now to make the process easier if and when you do file taxes on their behalf. Here’s what you should be looking at:
Get a copy of their most recent tax filing
Did your parent file their taxes last year on their own or did they have a professional complete it? Either way, you’ll want to get a copy of it. It can provide an important starting point to help you determine which forms and information may need to be included when filing future returns.
Determine if they need to file this year
Depending upon their age and income, they may not need to file a personal income tax return. However, don’t make the mistake of relying on the fact that they said they don’t need to file one. In the words of Ronald Reagan, “Trust, but verify.” You don’t need the IRS coming after your parent, their estate or yourself.
If your parent does need to file, there are a number of documents you will need to obtain, just as you would for yourself. These would include:
- Annual bank and investment account statements
- 1099 forms
- Dividend distribution and gain and loss statements
- Donation receipts
- Closing statements from any real estate transactions
- Receipts from any taxes paid throughout the year
- Any unreimbursed medical expenses that may be tax deductible
Investigate whether they have long-term care insurance
While long-term care insurance can make your task easier if you are the hands-on caregiver, it may also be advantageous tax-wise, as well. This is because the premiums may qualify as deductible medical expenses. This can occur if the long-term care policy:
- Is IRS tax-qualified
- Is guaranteed renewable
- Doesn’t provide a cash surrender value
- Doesn’t pay costs that are covered by Medicare
- Provide that refunds (other than refunds upon death, surrender, or cancellation of the contract, and dividends) are used only to reduce future premiums or increase medical benefits
Look into deducting the costs of long-term care
Even if your parent doesn’t have a long-term care policy, you may be able to deduct the actual cost of their care if they become chronically ill or cognitively impaired. A licensed healthcare provider will need to prescribe their care, but it can include:
- Personal care services
Medical expenses provided within an assisted living facility, a nursing home may also be deductible. However, if they are staying there only for custodial reasons, the portion of their charges for meals and lodging would not be considered deductible.
Consider claiming them as your dependent
The IRS allows you to claim anyone related by blood, marriage or adoption as a dependent—if you both meet IRS requirements. They don’t even necessarily have to live with you. To be eligible to deduct their expenses from your tax return:
- They must be a legal resident of the United States, Mexico or Canada
- Their taxable income cannot be greater than the year’s cutoff amount ($4,050 in 2017). Social Security income is normally excluded.
- They cannot file a joint return with a spouse
- You pay more than 50 percent of their annual living expenses which includes:
If you can claim them as a dependent, many of their unreimbursed medical costs may be deductible. IRS Publication 502 gives full details on nearly 100 medical costs that are deductible. Among these items are:
- Accepted therapies not covered by insurance
- Activities for older people with special needs
- Adult day care or in-home health care worker, if you are working
- Ambulance rides
- Copays and deductibles
- Cost of professional health aide during respite care
- Hearing aids
- Home and vehicle modifications needed for safety or mobility
- Hotel near the treatment center
- Memory care
- Physical therapy
- Transportation to appointments or services
As medical costs must exceed 10 percent of your adjusted gross income (7.5 percent if you and/or your spouse were 65 years or older in 2016) before you can claim them, a parent’s added expenses could help you meet these requirements.
If multiple siblings are sharing the costs (with none paying more than half and each contributing at least 10 percent), a multiple support declaration (IRS Form 2120) may be filed to grant one family member the exemption.
If you are considering claiming a parent as a dependent, ensure that you keep extremely detailed records and all receipts, small or larger, paper or electronic. Then consult a professional tax advisor.
Look into the child and dependent care credit
If you pay someone to care for your parent while you work or look for employment, you may also be able to take advantage of the Child and Dependent Care Credit (Also called the Elderly Dependent Care Credit or Aging Parent Tax Credit). Interestingly enough, they do not have to be dependent on your taxes to qualify. Instead, your parent:
- Must be physically or mentally unable to care for themselves and have lived with you for more than six months
- Could have been considered a dependent except they earned more than the allowed maximum. ($4,050 in 2017).
Unlike a deduction, which lowers your taxable income, this program allows for a tax credit that is deducted from the taxes you owe.
Investigate other deductions
If you are taking your parent’s medical expenses as a deduction on your income tax, there are a number of other easy-to-forget items, as well. These can include:
- Mileage, meals, and lodging for physician’s appointments
- Home improvements such as wheelchair ramps, handrails, and grab bars
- Energy-saving home improvements
- Mortgage interest on your own home or that of your parents
- Charitable deductions such as gently used durable medical equipment
Pay particular attention to state tax rules
Finally, many state governments also offer tax credits and deductions for caregivers on state income tax forms. Make sure that you investigate your individual state’s rules.
While I’m not a tax advisor (nor do I play one on TV), there are tax breaks you can take advantage of as you and your loved one travel along the gray mile. You’ll want to ask your own tax experts for more information. While any tax breaks that are applicable in your own situation may not make the journey any easier, they just could help to pay for some of the travel expenses along the way.