Caregivers Should Consider These Tax Breaks
Caring for a spouse or a parent can be stressful emotionally and financially, but there are a number of tax breaks that you could benefit from.
There are plenty of ups and downs if you’re caring for an elderly parent, disabled spouse or another adult family member. On the one hand, making a loved one’s life better can be rewarding. On the other, the time and effort it takes can wear you down. There are financial costs as well. For instance, you may be paying all or part of a family member’s medical or daily living expenses. Plus, you might be losing income because you can’t work—or work a full schedule—while caring for them.
Some organizations will help you cope with the emotional toll of caregiving. But what about assistance with the financial impact? That’s where Uncle Sam steps in with a collection of federal tax breaks, some of which have been enhanced for this year. You won’t necessarily qualify for each one, but you should at least check them all out. Here are the basics.
Qualifying for the Tax Credit for Other Dependents
If the relative you’re caring for can be claimed as a dependent on your tax return, you may be eligible for a $500-per-dependent tax credit. Generally, to claim an adult family member as a dependent in 2021, you must support the person financially for at least half the year. Neither you nor your spouse (if filing jointly) can be claimed as a dependent on someone else’s tax return. The dependent cannot have filed a joint tax return and must have a Social Security number and less than $4,300 of gross income, among other requirements. Note that you can’t take the credit if you are caring for a spouse because you cannot claim a spouse as a dependent.
Understanding the Child and Dependent Care Credit
The child and dependent care credit may apply if you pay someone to look after an adult family member while you work or look for work. That family member could be a spouse who is physically or mentally incapable of self-care and has lived with you for more than half the year. The care can also be for another loved one who is your dependent or could have been except that (1) he or she received at least $4,300 in gross income or filed a joint return or (2) you or a spouse, if filing jointly, could have been claimed as a dependent on someone else’s return.
For 2021, the child and dependent care credit may be worth as much as $4,000 if you’re caring for one family member or $8,000 if you’re caring for more. In other years, the maximum amounts are $1,050 and $2,100, respectively.
Utilizing a Flexible Spending Account
Two types of FSAs—medical and dependent care—could help with caregiver costs. If your employer offers these perks, check them out. The money is taken out of your paycheck and placed in the FSA where the funds are not taxed if used to pay for certain medical or dependent care expenses. For medical FSAs, you can contribute up to $2,750 in 2021. For dependent care FSAs, the limit is $10,500 for 2021; it’s $5,000 for other years.
Taking the Right Medical Expense Deductions
If you paid medical expenses for a family member, you may be able to deduct those costs, but there are stipulations you must meet. For example, you must itemize to claim this deduction, which is limited to medical expenses that exceed 7.5% of your adjusted gross income. Plus, your family member must be a spouse, dependent or someone who otherwise could have been a dependent if they satisfied certain requirements.
Consider Filing as Head of Household
Tax rates may be lower and the standard deduction higher for people filing as a head of household on their tax return. To qualify as a head of household, a family caregiver must be unmarried and pay more than half the cost of keeping up a home. The relative you’re caring for must be a dependent and live with you in the home for more than half the year. The exception is a dependent parent, who doesn’t have to live with you.
Potential Future Tax Breaks
During the 2020 campaign, President Joe Biden called for a new $5,000 tax credit for family members who provide long-term care for elderly relatives. He also proposed allowing caregivers to make “catch-up” contributions to their retirement accounts. Although these ideas have yet to be included in any of the president’s economic plans, that could always change with time.