Caring for someone with a chronic illness can be expensive, but these tax-saving moves may help defray some of the costs. By Susan B. Garland, Contributing Editor November 1, 2012 The cost of caring for someone with Alzheimer's disease or another chronic illness can be devastating. But you may be able to defray part of the expense by employing certain tax-saving strategies or write-offs. The tax breaks could go to the person with the medical condition or to a family member who assumes the financial burden of care.SEE ALSO: Special Report on Long-Term Care Medical deductions could provide valuable relief, for example, if you're tapping an IRA to cover costs. If you need $20,000 to pay for care, you'll need to take almost $27,000 from your IRA if you're in the 25% tax bracket, so you can cover the federal tax bill, too. (State taxes could force an even bigger withdrawal.) But tax write-offs could limit the damage. "You're still bleeding cash, but at least you won't pay taxes," says Ben Neiburger, an elder-law lawyer at Generation Law, in Elmhurst, Ill. Deductions in 2012 are allowed for medical expenses that exceed 7.5% of your adjusted gross income. The threshold rises to 10% in 2013 for most taxpayers. However, for 2013 to 2016, the 7.5% threshold applies if either spouse turns 65 by the end of the year. A wide range of services associated with the diagnosis and treatment of Alzheimer's disease and other conditions count toward the threshold, including long-term-care insurance premiums, drugs, hospital care and physician services. (For an extensive list of eligible expenses, see IRS Publication 502, Medical and Dental Expenses, at www.irs.gov.) Advertisement But many caregiver-related expenses are not automatically considered deductible medical expenses. For long-term-care services -- such as nursing homes, assisted living, adult day care, in-home care and respite care -- and personal-care services -- such as house cleaning -- to qualify, a licensed health care professional must certify an individual as "chronically ill" and prescribe the services under a plan of care. A person is chronically ill if he or she needs supervision as a result of severe cognitive impairment or needs help to perform at least two activities of daily living, such as eating and dressing. A working spouse could offset some of the costs of hiring an in-home aide by claiming a dependent-care tax credit. For most taxpayers, the credit is worth 20% to 35% of the cost of care (depending on your adjusted gross income), up to $3,000 of expenses for one dependent and $6,000 for two or more. Because your relative must live with you, eligible expenses can include the cost of adult day care but not the cost of a nursing home or assisted-living facility. (For more information, see IRS Publication 503, Child and Dependent Care Expenses.) Many states offer their own dependent-care tax credits or deductions to help defray the costs of caring for a chronically ill family member. If you hire a caregiver on your own and pay $1,800 or more in wages, you have to pay Social Security and Medicare taxes for your employee. Your share is 7.65% of wages. You must withhold the employee's share of 5.65%, or you can pay it from your own funds. You'll also owe federal unemployment tax of 6% on the first $7,000 in wages, although you may be eligible for a tax credit to offset part of the tax. You could owe state unemployment tax, as well (see IRS Publication 926, Household Employer's Tax Guide). Tax Breaks for Adult Caregivers Advertisement Caregivers who are adult children or other non-spouse relatives also can claim breaks for expenses incurred in caring for someone with a chronic condition. To do so, however, the caregiver must be able to claim the individual as a dependent. To be eligible, the caregiver -- say, the adult child -- must provide more than half of the parent's total support for the year. Support could include expenses for medical treatment, food and transportation. A relative could be living in a nursing home or an assisted-living facility. Plus, the ill person's gross income must be less than $3,800 in 2012 ($3,900 in 2013), not including Social Security and tax-free disability payments. If your relative passes these tests, you can claim a dependent exemption, worth $3,800 in 2012. You also can deduct medical expenses for the parent's care and be eligible for a dependent-care tax credit. In the case of deducting a dependent parent's medical expenses, the parent's income can exceed the $3,800 gross income limit. You may be able to use your employer-based flexible spending account, which allows you to pay for out-of-pocket dependent care or medical expenses with pretax dollars. In 2013, you can designate up to $2,500 to a spending account. Rules vary by employer. Advertisement However, claiming your parent as a dependent in order to secure tax breaks may not be the right move. If a parent can afford to pay for nursing-home care, for example, there may be no reason to fork over the money simply to claim a medical write-off. Also, if your parents need nursing-home or assisted-living care but don't have the money to pay for it, they will likely qualify for Medicaid. "A thorough analysis of the family's income and assets should be performed to determine the best option for paying for long-term care," says Phillip Sanders, a certified public accountant and chief executive officer of ElderCareMatters.com, an online directory of elder-care experts. At that point, he says, an adult child can decide whether to pay the expenses (and claim the deduction) or have the parents spend down their resources to qualify for Medicaid.