With tax season upon us I wanted to remind families that people who care for qualifying relatives can claim tax deductions and credits for out-of-pocket medical expenses. For you to qualify for caregiver tax deductions and credits, the person you are caring for must be a spouse, dependent, or qualifying relative, as well as a U.S. citizen or resident of the United States, Canada, or Mexico. A qualifying relative includes a parent, stepparent, father-in-law or mother-in-law, or any other person who lived with you all year as a member of your household.
Medical deductions can include dental treatments, the cost of transportation needed to get to a medical appointment, health insurance premiums and qualified long-term care services. For a full list of allowable medical expenses, see Publication 502 (2009) at the IRS web site . Some key rules to remember are -
- You can only deduct medical expenses if they exceed 7.5% of your adjusted gross income.
- To qualify for a dependency deduction, you must pay for more than 50% of your qualifying relative’s support costs. The relative only qualifies as a dependent if he or she meets the gross income and the joint return test. Dependency Deduction If your relative doesn’t qualify as a dependent because of these tests, you cannot claim a dependency deduction, but you can still claim his or her medical expenses.
- If a group of people are sharing costs for a qualifying relative, a multiple support declaration (IRS Form 2120) can be filed to grant one family member the exemption.
- Long-term care medical expenses including diagnostic, preventive, therapeutic, curing, treating, mitigating, rehabilitative, and maintenance and personal care services are deductible if the services are required by a chronically ill individual and a licensed health care practitioner prescribes the care. An individual is chronically ill if unable to perform at least two of six activities of daily living, which are eating, toileting, transferring, bathing, dressing, and continence. An individual who is cognitively impaired and requires substantial supervision is also considered chronically ill.
- Nursing services performed in a nursing home, an assisted-living facility, or similar care facilities are also deductible expenses if the person is principally receiving care for medical reasons. However, if a person is staying at a nursing home, an assisted-living facility, or similar care facility only for custodial reasons, only medical expenses are deductible; in this instance, room charges and meals are not deductible. Nursing services performed at home are deductible expenses. If the patient is chronically ill, certain maintenance and personal care services are also deductible.
Senior citizens and caregivers should be aware that premiums paid for qualified long-term care insurance contracts are also deductible medical expenses. According to the IRS, the contract must be guaranteed renewable; not provide a cash surrender value; not pay costs that are covered by Medicare; provide that refunds, other than refunds upon death, surrender, or cancellation of the contract, and dividends are used only to reduce future premiums or increase medical benefits. For 2009, long-term care premiums are deductible up to the following dollar amounts: for individuals age 61 to 70 the limit is $3,180, for individuals 71 and older the limit is $3,980.
Many state governments also offer tax credits and deductions for caregivers on state income tax forms, so it pays to know your individual state’s rules.
By nature, tax rules are complex. It’s important to consult a tax attorney or accountant versed in eldercare tax issues about your specific situation before finalizing your taxes. The AARP also offers free assistance and tax tips for seniors through its Tax-Aide program; go to http://www.aarp.org/money/taxaide/.