According to the 2018 C.A.R.E. study published by Northwestern Mutual Life Insurance Company, 3 in 10 Americans are current or past caregivers and around 1 in 5 expect to become caregivers in the future. Additionally, 7 in 10 provide financial support to a loved one.
If you’re a caregiver for an aging parent or senior loved one, the new tax law signed by President Donald Trump in December 2017 includes changes that can affect you as a taxpayer.
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Below are common questions and answers for tax rules affecting caregivers, including what’s different for the 2018 tax year:
The dependent exemption is one area significantly impacted by the new tax law. For tax year 2017, a taxpayer caring for a parent can claim the parent as a dependent, along with the $4,050 dependency exemption, as long as the caregiver provided more than half the cost of keeping up the parent’s home, says Mark Gianno, CPA and president of Gianno and Freda, an accounting and financial planning firm in Hyannis, Massachusetts.
“Parents still qualify as dependents if the taxpayer maintained the parents in a separate residence, including assisted living and nursing homes,” says Gianno. However, the dependent exemption goes away after 2017.
What’s changed for 2018: Under the new tax law, there are no personal or dependent exemption deductions allowed. However, if the single caregiver’s loved one (defined as an aunt or uncle, sibling, parent or grandparent and mother-in-law or father-in-law) qualifies as a dependent, the taxpayer qualifies for head of household status, which is preferable to single status filing due to an increased standard deduction and more favorable income tax tables.
For more information, see IRS Publication 501, “Exemptions, Standard Deduction and Filing Information.”
A family caregiver can deduct long-term care premiums for a parent but the maximum deduction allowed for the premiums is determined by the age of the taxpayer claiming the deduction, says Gianno.
What’s new for 2018: “For 2018, the maximum deduction for long-term care premiums ranges from $420 for those aged 40 and under to $5,200 for those over age 70,” Gianno says. “These amounts are slightly higher than the 2017 limits.”
For 2018, if the parent qualifies as a dependent because the taxpayer provides over half the parent’s support and meets the other tests described above, the taxpayer qualifies for the new $500 family credit. “This is a non-refundable credit, meaning that the $500 credit can be used to reduce taxes but cannot be used to increase a refund to a taxpayer with no income tax liability,” says Gianno.
Below are some tax rules that affect caregivers but remain much the same for 2018:
Whether you pay taxes on your social security income depends on your “provisional income,” says Gianno. Provisional income is your adjusted gross income (without social security benefits). Then add one-half of your social security benefits plus tax-exempt interest such as interest on municipal bonds.
If this calculation results in an amount below $25,000 if single or $32,000 if married and filing jointly, your social security benefits are tax-free. However, if your provisional income is above those amounts, up to 50% of social security benefits can be taxed, says Gianno. If the provisional amount exceeds $32,000 (single) or $44,000 (joint return), 85% of your social security benefits can be taxed.
For more information, see “Are Social Security Benefits Taxable?” on the IRS website.
You can use your health savings account (HSA) or employer flexible savings account (FSA) for qualified medical expenses of a dependent, says Jamie Traughber, managing partner at Hargrove-Traughber, an estate planning and advanced tax planning firm in Louisville, Kentucky. After you establish the HSA/FSA, you can receive tax-free distributions to pay or be reimbursed for qualified medical expenses you incur.
“If you receive distributions for other reasons, the amount you withdraw will be subject to income tax and may be subject to an additional 20% tax,” says Traughber. “The important aspect is that the person receiving the care must also qualify as a dependent on your tax return. Keep in mind that non-prescription medicines other than insulin aren’t considered qualified medicines for HSA/FSA purposes.
For more information, see IRS Publication 969, “Health Savings Accounts and Other Tax-Favored Health Plans.”
Money that your parents give you to offset their expenses isn’t taxable to you, according to the IRS: “The amount is treated as support provided by your parents in determining whether your parents are your dependents.
For more information, see Publication 501, “Exemptions, Standard Deduction and Filing Information.”
Your parent’s social security benefits aren’t taxable to you, according to the IRS. You should consider social security benefits used for your parent’s support as “support provided by your parent” when determining whether you provided over one-half of your parent’s support to claim him or her as a dependent.
For more information, see Publication 501, “Exemptions, Standard Deduction, and Filing Information.”
Qualified medical expenses are generally medical and dental expenses paid to a care provider. “A taxpayer can deduct the medical expenses paid on behalf of a parent if the taxpayer pays over half the support of the parent,” says Gianno. There is no requirement that the parent be a dependent for the medical expenses to be deductible by the caregiver. For both 2017 and 2018, medical expenses must exceed 7.5% of adjusted gross income to be deductible.
For more information, see the IRS “For Caregivers” web page.
Do you have any other caregiver tax tips to share? We’d like to hear your suggestions in the comments below.