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As millions of families care for aging relatives, many overlook tax breaks that may help ease the financial burden.
Roughly 19% of Americans provided unpaid care for an adult with health or functional needs in 2020, according to the National Alliance for Caregiving, and those numbers continue to climb.
“The burden is really falling on women in their 50s and 60s,” said certified financial planner Nadine Burns, president and CEO of A New Path Financial in Ann Arbor, Michigan.
Moreover, many families have cut assistance from outside workers during the pandemic to reduce the spread of the virus, said Burns, who cares for her 83-year-old mother living 90 minutes away.
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However, taking care of elderly relatives isn’t cheap. Nearly 8 in 10 caretakers have out-of-pocket expenses, AARP reports, and the average costs are $7,242 per year.
But some caretakers may qualify for federal and state tax breaks, financial experts say.
Some federal write-offs hinge on an aging relative’s status with the IRS. Their loved one must be a “qualifying relative,” meaning they are a dependent on the caretaker’s tax return.
A qualifying relative must earn less than $4,300 for the year, and their caregiver needs to provide more than half of support, such as rent, food, transportation and more. They also must live with the caretaker full-time or meet a relationship test.
Caretakers often miss write-offs for what they spend on an aging relative’s medical expenses, said enrolled agent Adam Markowitz, vice president at Howard L Markowitz PA, CPA in Leesburg, Florida.
They may claim a tax break for a dependent’s unreimbursed medical expenses that exceed 7.5% of their adjusted gross income, assuming they itemize deductions.
For example, if the caretaker’s adjusted gross income is $100,000, they may deduct anything above the first $7,500 they spend on qualified medical expenses.
It can be really easy to get over the 7.5% threshold without even realizing it.
Vice president at Howard L Markowitz PA, CPA
“It can be really easy to get over the 7.5% threshold without even realizing it,” he said. “Especially if you add in your medical expenses and your kids’ expenses.”
Another write-off, the child and dependent care tax credit, may offer some relief for those shelling out the money for adult daycare or similar costs while they work. Congress boosted the credit for 2021 to 50% of expenses, up to $8,000 per dependent, capped at $16,000.
“That is, perspectively, a very very big deal this year,” Markowitz said.
Caretakers may also be eligible for a separate $500 dependent credit, provided they fall below the income thresholds. They may also explore their workplace’s dependent care flexible spending account benefits.
The caretaker may also qualify for the $1,400 stimulus payment if they didn’t claim their elderly relative as a dependent in 2020, assuming they meet the income requirements, Markowitz said.
For example, let’s say an elderly parent was on their own in 2020 and received the $1,400 stimulus payment in March 2021. If they moved into their daughter’s home shortly after, their daughter may also qualify for the $1,400 credit when filing their 2021 tax return, he said.
Caretakers on the cusp may explore ways to reduce their adjusted gross income, such as extra contributions to a 401(k) plan or individual retirement account before the end of 2021, Markowitz said.
Moreover, depending on where someone lives, there may also be state tax breaks available, Markowitz said. But every place is different, so it’s best to rely on a tax professional for guidance.
“Mileage may vary on the state level,” he added.
However, if an aging relative isn’t a dependent, there may be fewer opportunities, Burns said.
“I’m not finding a lot [in the tax code] that I can use to help my mom,” she said.
Long-term care legislation
Although the measure wasn’t part of the Senate’s $1 trillion bipartisan infrastructure package, it was included in the budget resolution framework. However, negotiations are still ongoing.