Since the Tax Cuts and Jobs Act (TCJA), a sweeping tax reform that took place in 2018, the IRS has created or revised over 500 taxpayer forms, instructions, and publications — many of which may affect your filing status and return.
Before filing this year, it’s important to know the possible tax implications of caregiving for you and your elderly loved one. Understanding IRS guidelines for caregiver and senior filing can help you save money and avoid costly mistakes.
Learn more about claiming your aging parent as a dependent or filing on their behalf, potential caregiver tax credits, and common deductions.
A family caregiver spends, on average, about $7,000 out of pocket on medical, housing, and care costs for their aging loved one each year. Learn how filing taxes can help recoup your costs.
Our advisors help 300,000 families each year find the right senior care for their loved ones.
If you’re caring for an elderly loved one, you may be able to claim them as a dependent on your income taxes. To qualify, you must meet the following five requirements:
If you and your siblings collectively provided more than 50% of your parent’s support in 2020, any sibling who paid 10% or more can qualify for a joint exemption. All those supporting must sign and file the Multiple Support Declaration.
If you can’t claim your parent because their income exceeds $4,300, or because they filed a joint tax return, you still may be able to deduct care expenses — if they make up over 7.5% of your annual taxable income. To deduct medical expenses, you still need to provide 50% of your elderly loved one’s care throughout the year (or 10% if sharing the cost with siblings). They must be a direct relation, and must meet U.S. residency requirements. Check IRS Publication 502 for more details and a full list.
Medical expenses that can be deducted include:
If you meet the following requirements, you may benefit from filing as head of household:
Surprisingly, this family caregiver tax credit doesn’t require your elderly loved one to qualify as a dependent. It’s based on the money you spend to care for them. You can claim up to $3,000 in caregiving costs for one person, or up to $6,000 for two or more. To receive the child and dependent care credit, you must meet the following qualifications:
Cohabitation. Your elderly relative must have lived with you for at least six months during the tax year.
Partial Dependency. They must either qualify as a dependent or meet all above qualifications, except maximum income or joint filing with a spouse.
Incapacity. Your relative must be physically or mentally incapable of caring for themselves.
Employment. You pay for a home care worker, adult day care, or other assistance to care for your loved one while you work or look for work.
Spousal employment. If you’re married, your spouse must also work, be a full-time student, or be disabled.
Money your elderly relative supplies to offset their care costs doesn’t count as taxable income. Similarly, if you cash their Social Security benefits and use the proceeds to pay for care, those benefits aren’t taxable to you.
However, that money can affect claiming your relative as a dependent. You still must cover 50% of their care costs independently — not including their Social Security or personal contributions.
Even if your relative doesn’t qualify as a dependent, they may need your help filing taxes. Tax preparation for the elderly is often more involved, due to contributing factors like retirement benefits, assets, and unique tax credits. The IRS Tax Guide for Seniors, Publication 544, offers information on credits and deductions.
It’s true some seniors aren’t required to file taxes. But not filing can lead to an audit if your elderly relative doesn’t meet qualifications. Review your loved one’s income, assets, and benefits to be sure.
A tax return is required when gross income exceeds the sum of the standard deduction for your filing status plus one exemption amount, according to the IRS. This applies to earned income, not social security, pensions, or annuities.
For the 2020 tax year, seniors need to file a return if:
If your loved one is unable to file their taxes due to mental or physical disability, and you’ll be filing in their stead, you can use Form 2848 to become a qualifying representative. This means you can directly receive and inspect confidential tax information. Often, lawyers will present this form when you first accept power of attorney for an aging relative.
Aging adults often have multiple sources of income, from part-time jobs to Social Security and retirement benefits. Your loved one’s filing status depends largely on the payments they receive.
Generally, Social Security benefits don’t count as gross income. If Social Security is a senior’s only source of income, they don’t need to file taxes. If your loved one receives money from both Social Security and other sources, like employment, they shouldn’t count benefits toward their gross income.
For example: If a senior received $18,170 in Social Security benefits, $12,000 in retired railroad benefits (half which are taxable), and earned $6,000 from a part-time job, their annual gross income would be $12,000 — under the $14,050 filing threshold. They wouldn’t need to file taxes.
There are a few circumstances when seniors must include a percentage of their Social Security benefits in gross income:
For example: The average Social Security beneficiary received $18,170 in 2020. If they lived with a spouse, but filed separately, 85% of those benefits — or $15,445 — would count as gross income. They would have to file taxes.
If your elderly loved one retired early on disability, taxable benefits from their employer’s disability retirement plan are considered earned income until they reach minimum retirement age. That’s the age when they would have received a pension or annuity if they hadn’t been disabled.
Thoroughly review the details of your relative’s disability retirement plan — for some companies, payments count as gross income through age 72.
Military retirement pay based on age or length of service is taxable, and it must be included as income for federal income taxes, according to the U.S. Army. That amount should be reported as pension income for the year. However, the amount a senior pays to participate in the Survivors Benefit Plan — also called annuities to support a spouse or other survivor — is excluded from taxable income.
For Social Security tax purposes, military retirement pay is not considered earned income, and the Federal Insurance Contributions Act (FICA) taxes aren’t withheld from military retirement pay.
Do seniors have to file taxes for retirement benefits? If your aging loved one receives payments in the form of pension or annuity from a qualified employer retirement plan, all or some portion of the payments may be taxable.
Payments are fully taxable if your relative didn’t contribute to the plan, according to the IRS. This means:
Payments are partially taxable if your loved one contributed after-tax dollars to their pension, annuity, or retirement plan.
If your loved one receives railroad retirement benefits, taxation rules are different. See Publication 54 for more information.
If a senior is chronically or terminally ill, they may receive accelerated death benefits or life insurance payments. These aren’t included as taxable income. These benefits can be used to pay for costs covering long-term care facilities, hospice services, or medically necessary in-home care.
Long-term care insurance contracts are often treated like accident or health insurance contracts. Payouts from them are generally not counted as gross income and aren’t taxable.
Your elderly relative may receive age or income-based tax credits, or have deductible annual expenses.
The Credit for the Elderly or Disabled is a unique tax credit that ranges between $3,750 and $7,500. Qualifying seniors must be:
The credit varies greatly by circumstance, marital status, and benefits. Review Publication 524 to see if your loved one qualifies and for more information.
Seniors can deduct most medical and dental expenses prescribed by a doctor. Generally, only expenses paid for in the tax year can be deducted, regardless of when a procedure took place. Keep receipts and documentation for all services. In addition to surgeries, appointments, and prescription drugs, many often-overlooked expenses can be deducted, including:
Some expenses that can’t be deducted include:
For senior living expenses to be tax deductible, the resident must be considered “chronically ill.” This means a doctor has certified that the resident either:
In addition, personal care services must be provided according to a plan prescribed by a licensed health care professional. A doctor, nurse, or social worker must prepare a plan that outlines the daily services and care a resident will receive. Most assisted living communities create care plans for residents, which can be used to determine tax-deductible services. This means independent and retirement communities generally don’t qualify as deductions.
Expenses must also exceed 7.5% of a senior’s annual income to be tax-deductible.
Seniors who still own a home and pay a mortgage can deduct all interest on mortgages that don’t exceed $750,000.
Even if an elderly loved one sells their home, if they’ve lived in it for two or more of the past five years, they don’t have to pay taxes on profits less than $250,000 — or $500,000 for married seniors filing jointly. Profits from the sale of a home can be used to pay for senior living communities that offer health care. This includes memory care, nursing homes, and some assisted living communities that provide medical assistance.
Medical expenses and wages paid for nursing services can be included as deductions. The services don’t have to be performed by a registered nurse, as long as they’re considered medically necessary or are not possible for a senior to perform independently. This includes medication management, changing bandages or dressings, and help performing ADLs, either in home or in a senior care community.
If a caregiver also provides personal services, like housekeeping, meal preparation, or transportation, only nursing services can be deducted as a medical expense.
Filing taxes on behalf of a senior, or as a caregiver, can be complicated. Start by organizing documents, gathering past tax records, and determining your loved one’s filing status.
Determine if you’re claiming an elderly loved one as a dependent or filing separately. Use the above information to decide if your aging relative qualifies as a dependent, and if you’ll be receiving a caregiver tax credit, or they’ll be filing for an elderly tax credit.
Gather records. If this is your first year helping an elderly relative file taxes, be sure you have previous years’ returns available. Reviewing documents from the past three years can often help prepare you for filing.
Organize documents. Use a file folder or online program to keep track of important documents throughout the year. Some things to keep track of include:
File electronically. The IRS calls E-file the “safest, fastest and easiest way to submit individual tax returns.” Filing electronically is often more efficient than filing by mail. Plus, most tax prep software offers reviews before submission. Most electronic refunds are sent by direct deposit within 20 days.
Double-check. Sometimes, small errors can lead to serious consequences. Review everything from social security numbers to income amounts before filing, or consider having a tax professional look over your work.
Consider asking for help. We suggest consulting a tax professional with any questions or concerns. Filing taxes is complicated, and errors can lead to audits or other future consequences. If your family works with a tax professional, see if they offer any discounts for senior tax preparation. The IRS website also recommends seeking local resources or free help from the following organizations:
AARP. “Tax Tips for Family Caregivers.”
AgingCare. “Tax Questions and Answers for Caregivers.”
Elder Law Answers. “Claiming a Parent as a Dependent.”
Elder Law Answers. Tax Deductions for Assisted Living Costs.
Forbes. “Medical Deduction Tax Relief.”
Intuit. “When Does a Senior on Social Security Stop Filing Taxes?”
IRS. “For Caregivers.” https://www.irs.gov/faqs/irs-procedures/for-caregivers
IRS. “Publication 554 (2020), Tax Guide for Seniors.”
Navy Federal. “Are VA Benefits Taxable?”
U.S. Army. “Federal Taxes on Veterans’ Disability or Military Retirement Pensions.”