Caring for an older adult, such as a parent or spouse, can be rewarding — but it can also require significant time and resources. To alleviate some of the financial impacts, some caregiver expenses can be tax deductible. Here’s how caregivers can deduct expenses and earn tax credits during the 2022 tax season.
Tax deductions for caregivers of older adults
When caregivers incur expenses for providing care to a loved one, they may be able to deduct some of those expenses during tax time. There are certain types of expenses that are not eligible, though, so it’s important to know whether the expenses you incur qualify.
Eligible and ineligible caregiver expenses
Caregivers of older adults can deduct several itemized expenses related to caregiving. Eligible deductible expenses include
- Assisted living costs, including the cost of nursing homes, when incurred for medical reasons.
- Home health aide costs incurred during respite care.
- Medical and therapeutic services, including physical or occupational therapy. This also includes any copayments or deductibles that have not been reimbursed.
- Prescribed medication and medical equipment, including hearing aids and walkers.
- Transportation for medical appointments or services.
Any costs not deemed necessary to the care of the older adult are ineligible and include
- Cosmetic surgeries, unless necessary following a disfiguring disease, an accident, or trauma.
- Nonprescription medication — except insulin — and illegal or non-FDA-approved medications.
- Other non-care-related expenses, including life insurance policies, funeral costs, or travel recommended by a doctor for respite.
Rules and regulations for expenses to be tax deductible
According to the Tax Cuts and Jobs Act, taxpayers have no limits on itemized deductions. But, caregivers who want to deduct expenses should ensure they pay for care from an eligible account.
Flexible spending accounts (FSAs) and health savings accounts (HSAs) pull from pre-tax earnings, then deposit the funds into a medical savings plan. These funds can then be used for out-of-pocket health care costs for an individual and their dependents. It’s important to know that if a caregiver uses an FSA or HSA to pay for a given expense, they cannot also deduct that expense from their taxes.
Tax credits for caregivers of older adults
Caregivers may also qualify for tax credits if they meet the requirements. These tax credits can help ease the financial burden of providing care for a loved one. Here are the types of tax credits and how a taxpayer qualifies for them.
Types of tax credits
Two major federal tax credits are available to taxpaying caregivers of older adults: the Child and Dependent Care Credit and the Credit for Other Dependents.
The Child and Dependent Care Credit is a refundable tax credit based on caregiving costs. These may include home care, adult day care programs, and other expenses allowing the taxpayer to work or actively seek work. Family caregivers can claim up to $8,000 in caregiving costs for a single dependent and up to $16,000 for two or more dependents.
The Credit for Other Dependents is a non-refundable tax credit of up to $500 for qualifying dependents, including older parents or relatives. This credit begins to phase out for taxpayers with over $200,000 in income or $400,000 for married couples filing jointly.
Rules and regulations to earn a tax credit
To qualify for the Child and Dependent Care Credit, the following requirements must be met:
- Cohabitation: The older adult has lived with the caregiver for at least six months during the tax year.
- Dependency: The older adult is the taxpayer’s dependent or would otherwise be eligible to be, barring maximum gross income amounts and/or a joint filing with a spouse.
- Necessity for employment: The taxpayer pays an outside care provider to provide assistance that enables the taxpayer to work or actively seek work.
- Spousal qualifications: If married, the taxpayer’s spouse is also employed, a student, or disabled — in other words, they cannot provide care while the taxpayer is working.
For those seeking the Credit for Other Dependents, the following requirements must be met:
- Dependence of the older adult: The older adult lives with the taxpayer, who pays over 50 percent of the individual’s living expenses.
- Income: The older adult’s gross income does not exceed the cutoff amount in a given tax year.
- Legal residency: The older adult is a U.S. citizen, national, or legal resident with a valid identification number.
- Living arrangements: If the older adult is a parent or relative, they have lived with the taxpayer for over six months. If the older adult is not a relative, they have lived with the taxpayer for the entire tax year.
- Married dependence: If the older adult is married, they did not file a joint return with their spouse.
- Non-dependence of the taxpayer: The taxpayer looking to claim a dependent is not a dependent of anyone else.
Caregivers who are unsure whether they can claim an older adult as a dependent can use an IRS interactive tool to determine eligibility.
Family caregivers and employment taxes
In addition to tax deductions and credits, special tax rules for family caregivers also apply. Caregivers are typically considered employees of the individual for whom they provide services. If the said employee is a family member, an employer may not need to pay employment taxes; however, the employer must still report any caregiver compensation.
In some cases, family member caregivers are classified as independent contractors or self-employed rather than employees of the older adult. Generally, family caregivers will not owe self-employment tax as long as they are not providing services as part of an adult day care or other caregiving business.