Tax Breaks for Family Caregivers

As the population ages, more and more family members are taking on the role of caregiver for their aging loved ones. Caregiving can be a demanding and challenging job, both emotionally and financially. Fortunately, there are several tax breaks for family caregivers that can help offset the costs of caregiving.

This blog post explores the different tax breaks available to family caregivers and how to qualify for them.

Dependent Care Tax Credit

The Dependent Care Tax Credit is a tax credit that allows family caregivers to claim a portion of the expenses they incur while caring for a dependent. To qualify for the Dependent Care Tax Credit, the dependent must be a child under the age of 13 or an adult who is unable to care for themselves due to a physical or mental disability.

The amount of the credit is based on a percentage of the expenses incurred, up to a maximum of $3,000 for one dependent or $6,000 for two or more dependents. The credit is available to caregivers who work outside of the home or who are actively looking for work. See IRS Publication 502 and 503.

The maximum credit amount is $500 for each dependent who meets certain conditions. This credit can be claimed for:

• Dependents of any age, including those who are age 18 or older.
• Dependents who have Social Security numbers or Individual Taxpayer Identification numbers.
• Dependent parents or other qualifying relatives supported by the taxpayer.
• Dependents living with the taxpayer who aren't related to the taxpayer.

The credit begins to phase out when the taxpayer's income is more than $200,000. This phaseout begins for married couples filing a joint tax return at $400,000.

Under this provision, in effect through the 2025 tax year, the Internal Revenue Service allows family caregivers to claim some individuals related by adoption, blood or marriage — and even some friends — as other dependents on their federal tax return if both parties meet these IRS requirements:

• Legal residency. Your loved one is a U.S. citizen, U.S. national or legal U.S. resident and has a valid identification number — a Social Security number, Individual Taxpayer Identification Number or Adoption Taxpayer Identification Number.
• Income. Your loved one’s gross income is not greater than that tax year’s cutoff amount, which in 2022 is $4,400. Unless you request an extension, the deadline to file your 2022 federal tax return is April 18, 2023.
• Dependence on you. Your loved one lives with you and you pay more than 50 percent of that person’s living expenses, including clothing, food, lodging, medical and dental care, recreation, transportation and other necessities.
• Two or more people can split these expenses, generally laid out in a legal document called a multiple support agreement. But only one can claim the person as a dependent, and that person must pay more than 10 percent of the support costs.
• Living arrangements. You may claim a friend, honorary auntie or other unrelated loved one as a dependent, but he or she must have lived with you the entire year.
• Married dependent considerations. You can claim a dependent who is married only if he or she does not file a joint return with the spouse or files a joint return only to get a refund of income tax withheld and does not claim any other credits or deductions.
• Not a dependent yourself. You can claim a dependent only if you are not a dependent of another taxpayer.

The IRS has an interactive tool to help you determine if a dependent qualifies you for a tax credit.

Medical Expense Deduction

The Medical Expense Deduction allows family caregivers to deduct the cost of medical expenses for their dependent on their tax return. To qualify for the Medical Expense Deduction, the medical expenses must exceed 7.5% of the caregiver's adjusted gross income.

Medical expenses that can be deducted include expenses related to medical care, equipment, supplies, and home modifications. Caregivers can also deduct transportation expenses related to medical appointments and other medical-related trips.

Home Office Deduction

If a family caregiver provides care for their dependent in their home, they may be eligible for the Home Office Deduction. This deduction allows caregivers to deduct a portion of their home expenses, including rent, mortgage interest, utilities, and insurance.

To qualify for the Home Office Deduction, the caregiver must use a portion of their home exclusively for caregiving activities, and the space must be regularly and exclusively used for business purposes.

Family Caregiver Credit

Some states offer a Family Caregiver Credit, which provides a tax credit to family caregivers who care for a dependent at home. The credit is available to caregivers who provide a minimum of 200 hours of care per month and who meet income eligibility requirements.

The amount of the credit varies by state and can range from a few hundred dollars to several thousand dollars per year.

In conclusion, family caregivers face significant financial challenges, but there are several tax breaks available that can help offset the costs of caregiving. These tax breaks include the Dependent Care Tax Credit, Medical Expense Deduction, Home Office Deduction, and Family Caregiver Credit. It's essential to consult with a tax professional to determine which tax breaks you may qualify for and how to claim them on your tax return.

Flexible Spending Account

A Flexible Spending Account (FSA) is a benefit offered by some employers that allows employees to set aside pre-tax dollars to pay for eligible medical expenses, including those incurred while caring for a dependent. If your employer offers an FSA, you can contribute up to $2,750 per year to the account to pay for eligible medical expenses.

To take advantage of an FSA, you must enroll during your employer's open enrollment period. Once enrolled, you can use the funds in your account to pay for eligible medical expenses, including copays, deductibles, and eligible home health care expenses.

Tax-Free Assistance Programs

Some states offer tax-free assistance programs for family caregivers, which provide financial assistance to help offset the costs of caregiving. These programs vary by state but may include cash payments, respite care services, and home modifications.

To qualify for these programs, caregivers must meet certain eligibility requirements, such as providing a minimum number of hours of care per week, meeting income requirements, or caring for a dependent with a specific medical condition.

It's essential to research available assistance programs in your state and consult with a tax professional to determine which tax breaks and assistance programs you may qualify for.

Additional Tips

1. Keep accurate records - It's essential to keep accurate records of all medical expenses and caregiving expenses. This includes receipts, invoices, and other documentation that can support your claims.
2. Consult with a tax professional - Tax laws can be complex, so it's essential to consult with a tax professional who can help you understand which tax breaks and assistance programs you may be eligible for and how to claim them on your tax return.
3. Research available assistance programs - In addition to tax breaks, there may be other assistance programs available in your state that can help offset the costs of caregiving. Research these programs and consult with a social worker or other professional who can help you understand the eligibility requirements and application process.
4. Take advantage of employee benefits - If you are employed, check to see if your employer offers any benefits that can help offset the costs of caregiving. This may include an FSA or other benefit programs.
5. Prioritize self-care - Caregiving can be emotionally and physically demanding, so it's important to prioritize self-care. This includes getting enough rest, eating a healthy diet, and seeking support from friends, family, or support groups.

Conclusion

In conclusion, caregiving can be a significant financial burden, but there are several tax breaks and assistance programs available to help offset the costs. By keeping accurate records, consulting with a tax professional, researching available assistance programs, taking advantage of employee benefits, and prioritizing self-care, family caregivers can reduce their financial burden and provide the best possible care for their loved ones.