It is very common for family members to look after other family members or help them financially when medical or long-term care is needed. It is also common for these families to leave money on the table by not taking advantage of all the tax breaks they could.
Support can take several forms.
An adult child can help pay for a parent’s home care services. Services may be basic housekeeping and meal preparation, or they may include nursing or other medical services. Or the adult child could pay all or part of the cost of an assisted living or similar residence for the parent.
Other times, an adult child or other family member will personally care for an older relative, either at the caretaker’s home or at the caregiver’s home. The caretaker may pay some or all of the costs or provide only personal services while the caregiver’s resources pay for food, utilities, and other expenses.
Each form of care has financial and fiscal consequences. Families need to pay attention to the details and rules in part to make sure they receive maximum tax benefits and in part to make each family member feel treated fairly.
The first step is to determine if the caregiver is considered a dependent on the caretaker’s tax return. The law on tax cuts and employment enacted in 2017 removed the personal and dependent exemption amounts. But when the person in care is considered a dependent, the caretaker may be able to deduct medical expenses from the person in care and receive other tax benefits.
Suppose Max Profits is helping his mother, Minnie.
Max can claim Minnie as a dependent if multiple tests are met. First, Minnie’s gross income for 2021 must be less than $ 4,300.
Social security benefits and tax-exempt interest are generally not included in the income test. If Minnie has savings or investments that generate too much taxable income, Max could still qualify for the exemption in the future if Minnie changes investments so that they generate less income.
Plus, Max must provide more than half of Minnie’s support for the year. Support includes living expenses such as clothing, housing, education, medical expenses, recreation and transportation. If Minnie lives in Max’s residence, the fair market rental value of the unit is included in the amount of support provided by Max.
Profits will need to keep up with the amounts everyone spends on supporting Minnie over the course of the year, and may need to schedule payments made towards the end of the year in order for Max to pass the 50% test. For a longer list of expenses that can be considered support, see free IRS publications 17 and 501, available on the website www.irs.gov.
Minnie must also be a U.S. citizen or a resident of North America.
Some family members can be claimed as dependents even if they live in a different household. These family members are parents, in-laws, in-laws, grandparents, great-grandparents, and aunts and uncles.
Any other person can only be a dependent if he or she is a full-time member of the same household during the year.
Minnie also cannot file a joint tax return with another taxpayer, unless the return is being filed solely to receive a tax refund and there is no tax payable for it. year.
When multiple siblings share someone’s support, none can meet the 50% support test. In this case, it is still possible for one of them to claim the person as a dependent. All siblings must sign IRS Form 2120, Multiple Support Declaration, agreeing on which of them claims the person as a dependent.
The brother or sister who declares the dependent files the form with their income tax return. Each signatory of the form must contribute at least 10% of the person’s support for the year. Siblings can adjust the amounts each contributes to care to reflect the fact that one of them might receive tax benefits.
The sibling who claims the person as a dependent can be renewed annually, or the same person can claim the person as a dependent.
Although a dependent exemption cannot be deducted under current law, a taxpayer who can claim a dependent can deduct the medical expenses he paid for the dependent.
But you may not need to claim a dependent to deduct medical expenses paid on their behalf.
Back to Max and Minnie. Suppose Minnie is considered Max’s dependent, except for the income test. In this case, Max can deduct Minnie’s medical expenses he pays. To secure the deductions, Max would have to pay the medical providers directly instead of reimbursing Minnie.
When Max is eligible to deduct Minnie’s medical expenses, he adds those expenses to the rest of her and her family’s medical expenses. To deduct medical expenses, Max must itemize the expenses on his tax return, so his total itemized expenses must exceed the standard deduction. Itemized expenses include medical expenses, charitable contributions, and state and local taxes up to $ 10,000.
Max can only deduct medical expenses that exceed 7.5% of his adjusted gross income.
When siblings have a multiple support agreement, only the person who can claim the dependent can deduct the medical expenses. Thus, the person qualified to claim the other person as a dependent would have to pay all medical expenses.
Once Minnie qualifies as Max’s dependent, it is important for him to keep track of all medical expenses he pays on behalf of Minnie. Most people don’t make all of the expenses that are considered medical expenses and unwittingly forgo significant tax deductions. For example, round-trip travel expenses for medical treatments and appointments are deductible at the rate of 16 cents per mile in 2021.
Being able to claim a person as a dependent can lead to further tax breaks.
The caregiver may be able to claim the child and dependent care credit for expenses paid to care for the person while the caregiver goes to work. The credit is claimed by including Form 2441 with the income tax return.
When the caregiver’s employer offers a Flexible Dependent Expenditure Account (FSA), the caregiver can choose to have the salary contribute to the FSA tax-free. Then the account can provide tax-free reimbursements for expenses paid for the care of the person.