Navigating Caregiving Tax Issues
It is that time of year. Time to file your taxes. Each year I pen a blog post with recommendations for unpaid family caregivers. To be clear, this is not tax advice that will withstand a tax audit. What I am writing is a guide to help you find elements of our complicated tax code to get you some relief from the financial burden you are experiencing. In fact, family caregivers often shoulder significant expenses, averaging around $7,000 annually, with a staggering 23% accumulating debt. However, amidst these challenges, there are avenues to alleviate some of the financial burden through savvy tax strategies.
Who Qualifies as a Dependent?
The Internal Revenue Service (IRS) offers tax credits for dependents who meet certain criteria. If you provide care for an aging family member who qualifies as a dependent, you may be eligible for valuable tax credits. Dependents typically include individuals who rely on you for financial support and meet specific residency, relationship, and income requirements. To qualify, you must meet specific IRS conditions regarding the care recipient’s eligibility, your employment status, and the amount of care provided. By claiming this credit, you can reduce your taxable income, potentially leading to a lower tax bill or a larger refund.
While the name may suggest it’s only for children, the Child and Dependent Care Credit can also be applied to caregiving expenses for aging relatives who meet the criteria. This credit can help offset the costs of caregiving, including adult daycare, in-home care services, and other related expenses. To qualify, you must meet specific IRS conditions regarding the care recipient’s eligibility, your employment status, and the amount of care provided.
Deducting Medical Expenses
Did you know that a caregiver can use their Health Savings Account to pay for supplies and equipment for their loved ones? Caregivers can often deduct medical expenses incurred on behalf of their loved ones. These deductions can encompass a wide range of costs, including doctor’s visits, prescription medications, medical supplies, and even certain home modifications necessary for caregiving. Remember that these deductions are subject to certain limitations and conditions set forth by the IRS.
Documenting Caregiving Expenses
The first question to answer is, did you keep detailed records of your caregiving expenses in 2023? Despite not residing with your loved one, you likely incur various expenses related to their care during your visits. These documented expenses may qualify for deductions or credits when you file your taxes, helping to mitigate the financial impact of caregiving.
Establishing Dependency and Support for Long-Distance Caregivers
Even if you don’t live with your aging loved one, you may still be eligible to claim them as a dependent on your tax return if you provide a significant portion of their financial support. This support could include contributions toward housing, medical expenses, groceries, or other necessities. I recommend scouring your bank, credit card, and other financial records for expenses that you may be forgetting. Let’s be honest, it is difficult to remember all your caregiving activity throughout the course of a year.
Great Technology to Organize Records
As a long-distance caregiver, staying organized is essential for maximizing tax benefits. Utilize technology tools such as expense tracking apps, spreadsheets, or cloud-based storage systems to maintain detailed records of caregiving expenses. These digital resources can streamline the tax preparation process and ensure you don’t overlook any eligible deductions or credits. Ask your bank if they have an expense tracking app as part of their services. Personally, I love the QuickBooks app.
What is the Earned Income Tax Credit?
As the saying goes, a picture is worth a thousand words. Here are the 2023 Earned Income Tax Credit (EITC) thresholds. Keep in mind, taxpayers must ensure they have valid Social Security numbers for themselves, their spouse (if filing jointly), and each qualifying child claimed for the EITC. These SSNs must be issued before the April due date of the return, with special rules for military personnel or those residing outside the country.
State Sponsored Caregiver Tax Credits
While many states offer various forms of assistance for caregivers, not all of them have specific caregiver tax credits. However, it’s worth noting that some states may have programs or initiatives aimed at supporting caregivers through other means, such as respite care services, caregiver training programs, or Medicaid waivers that provide financial assistance for caregiving-related expenses. Additionally, some states may offer general tax credits or deductions that caregivers could potentially qualify for, even if they’re not explicitly labeled as caregiver tax credits.
Get Professional Assistance
Tax season is that necessary evil we all endure. As painful as it may be, I am impressed with the IRS.gov site. The amount of free assistance has grown tremendously. In fact, a pilot project enabling certain states to file electronically is a huge step toward a fairer and easier tax system, in my humble opinion.
That being said, navigating the tax implications of caregiving can be complex, but with proper planning and awareness of available deductions and credits, caregivers can ease the financial strain associated with caring for aging loved ones. Whether you reside with your family member or provide assistance from a distance, understanding and implementing these tax-saving strategies can make a significant difference in your financial well-being. As always, consult with a qualified tax professional for personalized guidance tailored to your specific situation and maximize your tax savings as a dedicated family caregiver and good luck.
