Tax season is in full swing, much to the chagrin of many tax payers and even a few overwhelmed accountants. But for seniors and caregivers, tax season means it's time to round up medical expenses, mileage, and other expenses associated with your own care or the care of a loved one for the 2014 tax year. It's no secret that taxes can be confusing, so it's often difficult to know what tax benefits you or your loved ones are eligible to receive. (And to make things a little more complicated, tax credits, deductions, and thresholds often change from year to year.) These tips will help you navigate this tax season successfully and minimize your tax burden.
Deducting out-of-pocket medical expenses
For many tax payers, the threshold for deducting out-of-pocket medical expenses has increased from 7.5% of adjusted gross income to 10% of adjusted gross income for the 2014 tax year (for which you'll file in early 2015). But if you or your spouse are over the age of 65, you're exempt from that increase through the 2016 tax year (to be filed in 2017). What that means is you're eligible to deduct the amount of your out-of-pocket (unreimbursed) and allowable medical and dental expenses that exceeds 7.5% of your adjusted gross income.
In other words, if your total out-of-pocket, allowable medical expenses equals 10% of your adjusted gross income, you may deduct the 2.5% that exceeds the 7.5% threshold, but not the entire 10%. Travel expenses for medical care are also eligible, including mileage on your vehicle, bus fares, parking fees, and related expenses. A complete list of all qualifying medical and dental expenses can be found here.
Determining if your care recipient qualifies as a dependent
For caregivers, one of the most common questions to arise is whether the care recipient qualifies as a dependent on the caregiver's tax return. A general rule of thumb is that an individual may qualify as a dependent when the care provider provides more than 50% of the recipient's support for food, housing, medical care, transportation, and other basic needs.
The care recipient must also be a relative to qualify as a dependent, such as a mother, father, grandparent, mother-in-law, or father-in-law, but the dependent need not live with you as long as you are providing at least half of the person's total support.The care recipient's adjusted gross income must be less than $3,950, and he or she may not file a joint return with his or her spouse in order for a caregiver to claim the individual as a dependent. The good news is that if your loved one meets the eligibility requirements as a dependent, any out-of-pocket costs you contribute to his or her care will count towards your personal 7.5% or 10% threshold for the medical expense deduction.
Assisted living and other long-term care costs
If your loved one resides in an assisted living community, dementia care community, or other long-term care community, some or all of these costs may be deductible on your taxes, as well. According to MarketWatch, medical professionals must deem your loved one "chronically ill" in order for you to be able to deduct the full cost.
"The IRS defines this as either having severe cognitive impairments that require round-the-clock supervisory care, or needing help with at least two activities of daily living, such as bathing, eating, dressing and using the toilet. Full basic monthly expenses can be deducted for those who meet these definitions," explains retirement reporter Elizabeth O'Brien. If your loved one is not deemed chronically ill, you may still deduct the portion of assisted living or long-term care fees that go toward medical care and expenses, such as nursing services, certain therapies, and medications.
What about long-term care insurance?
Qualified long-term care insurance premiums also count towards your out-of-pocket medical expenses. According to IRS Publication 502, "a qualified long-term care insurance contract is an insurance contract that provides only coverage of qualified long-term care services." The Publication further clarifies that in order to qualify as a medical expense deduction, a long-term care insurance contract must:
- Be guaranteed renewable,
- Not provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed,
- Provide that refunds, other than refunds on the death of the insured or complete surrender or cancellation of the contract, and dividends under the contract must be used only to reduce future premiums or increase future benefits, and,
- Generally not pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare, except where Medicare is a secondary payer, or the contract makes per diem or other periodic payments without regard to expenses.
- For those age 40 and under: $370
- For those age 41 to 50: $700
- For those age 51 to 60: $1,400
- For those age 61 to 70: $3,720
- Age 71 or over: $4,660
IRS Publication 503 outlines the Child and Dependent Care Credit, which allows caregivers to receive tax credits if they paid someone to provide care to a dependent in order to be able to work outside the home or seek outside employment. These payments cannot be made to a person whom you could claim as a dependent on your tax return, a spouse, or to the parent of the qualifying person. The Qualifying Person Test will help you determine if you are able to take this deduction.
The Child and Dependent Care Credit may be up to 35% of your qualifying expenses, with other limits and criteria applying to the total eligible amount. For instance, you (and your spouse, if filing jointly) must have earned income in the tax year in which the credit is claimed, and the total qualifying expenses "must be reduced by the amount of any dependent care benefits provided by your employer that you deduct or exclude from your income."
Credit for the Elderly or Disabled
If you turned 65 prior to December 31, 2014, retired on permanent and total disability, and have taxable disability income, you may qualify for the Credit for the Elderly or Disabled. IRS Publication 524 outlines the eligibility requirements and income limits in more detail. Figure A will help you determine your eligibility, and Table 1 can be used to determine if your income exceeds allowable thresholds to qualify for the credit.
The amount of the Credit for the Elderly or Disabled ranges from $3,750 to $7,500, depending on a variety of factors such as filing status, age, the status of any dependents, and whether one or both spouses are 65 or older and retired on total disability.
Just a few years ago, there weren't many tax benefits available to family caregivers or even senior citizens. But as the population ages and more individuals are serving as primary family caregivers to an aging loved one than ever before, the government is beginning to implement credits and eligible deductions to help seniors and caregivers reduce their tax burdens. Caregiving is stressful both emotionally and financially, so these tax benefits are a welcome relief that enables some caregivers to continue providing much-needed care and support to their aging loved ones. If you're a senior or a family caregiver, be sure to talk with an accountant about all the possible tax benefits available to you to minimize your tax burden or maximize returns.