As you get older, the likelihood increases that you will need to care for an aging parent (or possibly more than one). Depending on your circumstances and theirs, the best solution might be bringing them into your home, so that they can live with you. When that happens, there’s a huge chance that it will affect every aspect of your life, including your finances.
At Cook Martin Poulson, it is our goal to help our clients prepare financially for the eventuality of caring for their parents. You may not know that more than one tax credit is available if you have an elderly parent living with you. In this post, we explain what the credits are, who can take them, and what it means for your taxes going forward.
Tax Implications of a Parent Living with You
Let’s start by talking about the general tax implications of a parent living with you. There are several to consider.
The first and biggest implication is that taking in an elderly parent will add to your household expenses. Even if they have some income from Social Security, it may not be sufficient to pay for their comfort and care. For example, while your mortgage and property taxes will remain the same, your utility bills, grocery bills, and other expenses will likely increase.
On a related note, you may essentially be taking in your elderly parent as a dependent. In terms of taxes, that can be a good thing. We will talk more about the possibility of claiming your parent as a dependent on your taxes.
If you have siblings and you are all contributing to your parent’s care, then the tax implications may be more complex than they appear on the surface. As a result, you may need to consult with a tax professional to ensure that you handle your taxes properly.
At the other end of the spectrum, if your parents have money saved, they may decide to pay you on an ongoing basis or in a lump sum to help defray the cost of their living with you. The specifics of your situation will dictate, at least in part, how much financial impact taking in your parent will have on you.
Tax Breaks for Taking Care of Elderly Parents
If you are taking care of an aging parent in your home, there are tax breaks to help you recoup some of your expenses. Let’s review them here.
Credit for Other Dependents
The first potential tax break is the option of claiming your parent as a dependent on your tax return. You may do so even if your parent doesn’t live with you, but here, we focus on the requirements to claim dependency for a parent who does live with you. They include the following:
- Your parent must be a citizen or resident of the United States, Canada, or Mexico.
- Parents, grandparents, and step-parents are eligible; foster parents are not.
- They must not file a joint tax return. If married, they must file a separate return. The only exception is if they are filing only to claim a refund.
- Their gross income must be less than $4,300. Gross income does not include payments from Social Security or other tax-exempt income; however, if their gross income is over $25,000, part of their Social Security may be counted as gross income.
- You pay more than half of their support during the year. You may need to work out the details with your siblings if they are contributing to your parent’s care.
If you do qualify to claim your parent as a dependent, you can get a $500 dependent care credit when you file your federal income tax return.
Child and Dependent Care Credit
What happens if you have an elderly parent living with you and you pay someone to provide care for them while you work or look for work? The answer is that you may be eligible to take the Child and Dependent Care Credit.
The Child and Dependent Care Credit allows you to deduct up to $3,000 of care-related expenses if you hire someone to tend to a parent who lives with you. You can claim up to $6,000 if you are caring for two parents.
The only exception you should be aware of is that if you receive a dependent care benefit that is excluded or deducted from your income via your employer, you will need to subtract that benefit amount from the credit before you claim it.
Dependent Care Benefits
Suppose your employer offers a Flexible Spending Account (FSA) as part of your benefits package. In that case, you can take advantage of tax-free savings to offset the expenses of caring for your elderly parent.
As of 2021, the Internal Revenue Service allows up to $10,500 to be contributed tax-free to an FSA. There is a catch, though. You must claim your parent as a dependent if you want to use FSA funds to pay for their care.
The good news is that if you can claim your parent as a dependent, you can use your FSA contributions to reduce your taxable income and save a significant amount on your taxes. Even if you haven’t used your FSA in the past, you can start contributing now to prepare for potential future expenses.
Medical Expenses Deduction
Medical expenses can add up quickly when you are caring for an aging parent. By the time you have paid for prescription medications, doctor and hospital bills, and medical equipment, the cost can be extensive. The good news is that if the amount you pay exceeds the IRS threshold for medical expenses, you may be able to claim the medical expense deduction and deduct a portion of what you paid when you file your taxes.
As of 2021, the rule is that if your medical expenses exceed 7.5% of your adjusted gross income, then you may be able to claim part of those expenses as a tax deduction. For example, if your adjusted gross income was $50,000 and you paid $10,000 in medical expenses, then you could potentially claim $6,250 of those expenses as a deduction.
The caveat here is the same as for the FSA contributions. You must be able to claim your parent as a dependent to deduct any part of their medical expenses on your taxes. Keep in mind that state requirements may be lower than those imposed by the IRS, so you could save money on your state taxes as well.
Under the Tax Cuts and Jobs Act, the standard deduction for taxpayers increased as follows:
- $12,500 for singles and married filing separately
- $25,000 for married filing jointly
- $18,800 for a single head of household
We talk more about that final item below. You may be able to claim a larger standard deduction if you qualify to file as a head of household.
Before the passage of the Tax Cuts and Jobs Act, there was an option to claim a personal exemption on your tax return. The last tax year that you could claim a personal exemption for yourself or any dependents was 2017. The personal exemption was replaced by a higher standard deduction and other items, including the credit for other dependents as mentioned above.
We mention it here simply to round out your knowledge and because it might be confusing if you come across outdated information online.
Head of Household
This final tax break will not apply to you if you are married, but it could save you a significant amount on your taxes if you are single and take in an aging parent.
The Head of Household filing status is meant to assist people who aren’t married but are responsible for the care of one or more dependents. If you qualify to claim your live-in parent as a dependent, then you may also qualify to file as head of household.
The Head of Household filer gets to claim a larger standard deduction than single people. As noted above, the standard deduction for 2021 for heads of households is $18,800. That’s an increase of $6,300 from single status. It’s something we certainly encourage you to explore if you are single and caring for one or both of your parents at home.
What if Multiple Siblings Support an Elderly Parent?
One of the most complicated things about caring for an aging parent is how to cope when multiple siblings are involved. If you take a parent into your home, the emotional and financial burdens will impact you more than they will your siblings.
The first consideration to keep in mind is claiming dependency. As stated above, you must be paying at least 50% of your parent’s expenses to claim them as a dependent. If you share expenses among siblings, you should keep that percentage in mind and have a frank discussion about how they will contribute.
The second consideration to remember is that only one sibling may claim the parent as a dependent. You will run into problems with the IRS if more than one of you attempts to do so.
We should note here that in the past, you could have claimed a personal exemption if you paid at least 10% of your parent’s expenses; but with the elimination of the personal exemption, that is no longer the case.
Also, keep in mind that in most situations, the tax credits and tax deductions mentioned here apply only to the sibling who claims the parent as a dependent. If more than one sibling contributes to the parent’s care, you may want to consult a financial professional to help you navigate the finer points of sharing responsibility and managing the financial aspects of eldercare.
Future Tax Breaks to Support Family Caregivers: Credit for Caring Act
In addition to the tax breaks already mentioned, there may be more help on the horizon. In May of 2021, Senators Elizabeth Warren, Joni Ernst, Shelley Moore Capito, and Michael Bennet introduced the Credit for Caring Act in the Senate.
The bipartisan group of Senators has said that the act intends to provide much-needed relief to taxpayers who take on the burden of caring for an elderly or sick relative. They noted that it is common for families in the United States to pay more than $7,000 out of pocket each year to care for relatives and that the consequences can be severe.
Some of the potential financial downsides of taking in an aging parent can include the following:
- Halting savings for your retirement and future
- Taking on additional debt
- Cutting back on spending in other areas
The Senators’ documentation suggests that 45% of all families who take in an elderly parent experience at least one of the above negative financial consequences and some experience all three.
If the bill is enacted into law, it would provide a $5,000 tax credit to working families who must care for an elderly parent. The $5,000 would go a long way toward defraying related expenses and help families do what is necessary to ensure their parents are safe, healthy, and comfortable.
The law will, of course, need to pass in both the Senate and the House and go through the reconciliation process before it can make its way to President Biden’s desk for signature. If it does pass, then the tax savings for 2022 and beyond could be even more significant.
Our Tax Professionals Are Here to Help You Care for Your Aging Parents
The financial and tax implications of taking an aging parent into your home are significant, as are the emotional and personal ramifications. The tax breaks we have outlined here have been put in place to help families provide necessary care as their parents get older. The most important thing to remember is that caring for your parents doesn’t need to mean financial stress and hardship for you.
Determining your eligibility for elder care-related tax breaks can be complicated, but our tax professionals are here to help you minimize your tax liability by taking all available deductions and credits.