Tax Breaks for Caregivers

Caring for a parent or other relative takes both time and money. There are several tax provisions that can help you save money when providing this type of care.

Additional Exemption

If you are supporting an elderly parent or other qualifying person, you may be able to claim him or her on your tax return as a dependent. Claiming an additional dependent on your 2010 tax return could reduce your income by $3,650.

Who can qualify to be claimed as your dependent? Here is a partial list: parents, brother, sister, half-brother, half-sister, stepbrother, stepsister, grandparent, stepfather, stepmother, brother or sister of your father or mother, father-in-law, mother-in-law.

There are two tests in order to qualify. 1) The prospective dependent’s 2010 income must be less than $2,400. Social security income does not count for this purpose, but pension benefits, IRA withdrawals, interest or dividends do count. 2) You must provide more than half of the prospective dependent’s support, that is, costs for housing, food, medical care, transportation and other necessities. You must include social security income for the purposes of determining the amount he or she uses to support himself or herself.

Your family member or other qualifying person does not have to live with you to qualify as a dependent, as long as he or she meets the income test and you provide more than half of the person’s support. If the person does live with you, you can include a percentage of your mortgage, utilities and other expenses in calculating how much you contribute to this or her support. IRS Publication 501 has a worksheet that can help you with this.

Multiple Support Agreements

If several people together provide more than half of the recipient’s income, but no single person meets the test, one person may be designated each year to claim the dependent exemption. That individual must provide at least 10% of the recipient’s financial support.
For example, if several siblings provides less than 50% support for a parent, but their combined assistance exceeds half the parent’s support, then any sibling who provides more than 10% can claim the parent as a dependent. However, only one sibling can take the exemption in any single year. They can rotate the exemption, one sibling taking it one year, and another the next, and so on. The sibling who claims the parent as a dependent attaches Form 2120, Multiple Support Declaration, to his or her tax return.

Dependent Care Credit

If the family member or other qualified person has more than $3,650 in gross income and, thus, the caregiver is not entitled to take another exemption, the caregiver may still be eligible for a dependent care credit up to $1,050 if the recipient is physically or mentally unable to care for himself or herself. You can claim the dependent care credit for providing care to a spouse or other dependent so that you can work. Or you may be able to claim the amount paid for care as a medical deduction or a combination of both.

You (and your spouse if you are married filing jointly) must have earned income from wages, salaries, tips, other taxable employee compensation or net earnings from self-employment in order to claim the credit.

To claim this credit, you are not limited to considering only dependents and spouses as qualifying persons. You can also claim the credit for a person who lives with you who cannot care for himself or herself but cannot be claimed as a dependent because his or her gross income exceeds $3650.

Usually, it is advantageous to apply these expenses toward a dependent care credit up to the maximum amount ($3,000) and then treat the remainder of the expenses as medical expense deductions. Each situation must be analyzed, however.

Medical Deductions

If the caregiver pays for the medical or dental expenses and itemizes deductions for a dependent, the caregiver can combine the care recipient’s medical expenses with his or her own medical expenses. If the total medical expenses exceed 7.5% of the caregiver’s adjusted gross income, they can be taken as an itemized deduction for the caregiver.

If the care recipient isn’t considered a dependent for exemption purposes because he or she had more than $3,650 of income but met the other tests, he or she can still be counted as a dependent for medical deduction purposes.

Head of Household Filing Status

Single caregivers may use the filing status “head of household.” You must have cared for a dependent or qualifying person for more than half a year, and you must have paid more than half the cost of keeping up a home for a year. Claiming head of household status will increase the standard deduction amount and decrease the tax rate. If the qualifying person is a parent, he or she does not have to live with you for you to claim head of household status.

Reimbursement Accounts

Care expenses qualify for reimbursements from pre-tax reimbursement accounts maintained by your employer. If your employer provides such a plan, sometimes called a flexible spending plan, check it out.