Each New Year brings certain law changes; sometimes, these impact seniors and caregivers and sometimes, they don’t.
Many are confused over what has changed and what has not changed in the tax code for 2019. We will investigate how the government will tax medical expenses going forward.
Are there any new tax deductions for caregivers? We will look at which tax breaks for caregivers might be available and how you can qualify for them. We will also discuss how the rules are different for family caregivers versus employee caregivers.
Hopefully, these tax tips for seniors will help you reduce your overall tax burden.
Senior Care Tax Planning
An estimated 10,000 Americans are reaching retirement age, every day. Therefore, the United States senior citizen population is growing by leaps and bounds. Elder Care tax benefits for seniors are becoming increasingly important.
In Home Elder Care tax benefits for caregivers are only available if you satisfy certain Internal Revenue Service (IRS) criteria. These are very complicated with the financial thresholds changing every year. But in general, the IRS allows for a senior to be claimed as a dependent by their family caregiver if the following guidelines are satisfied:
- Senior must be relative
- Senior must be United States citizen
- Senior isn’t claimed by another taxpayer
- Senior not filing joint tax return with spouse
- Senior’s joint income is less than $3,950
- Caregiver provides more than half the financial support
Typically, the joint income excludes Social Security income. The caregiver financial support includes food, healthcare, transportation and housing expenses. If all of these guidelines are satisfied, then you might qualify for a caregivers tax credit.
New Changes in Tax Law Affecting Seniors & Caregivers
Every year, the financial thresholds are adjusted, usually to account for inflation. In 2019, tax brackets were adjusted, which should result in lower taxes for some. Now, there are 7 x tax brackets – ranging from 10% to 37%. Unfortunately, some deductions were either discontinued, ended or capped.
As you calculate the tax for seniors, you might see if you qualify for the “Credit for the Elderly or the Disabled.” This is for those who turned 65 by December 31st, 2017. You will need to file IRS Publication 554, Schedule R to see if you qualify.
To be claimed as a dependent, the senior must be a qualified relative, relative living with you or a member of your household. Details concerning dependent care credits can be determined by filling out IRS Publication 501.
Medical Expense Deductions
The IRS breaks down medical expense deductions into short-term and long-term periods of time. Generally, the concept of being chronically ill is what leads to expenses being considered long-term. IRS Publication 502 provides more information on medical expense deductions.
Short-Term Medical Expense Deductions
If you pass the IRS dependency test for caregivers, then you should start to make a list of itemized deductions for all of the expenditures – food, transportation, housing and medical. The government will tax medical expenses for seniors – due to their age, the elderly spend a higher percentage of their budget on medical expenses.
As their caregiver, you might spend a lot of money on prescription drugs, doctor’s visits and hospital stays. Officially, the IRS defines medical expenses as the following:
“Costs of diagnosis, cure, mitigation or prevention of diseases and costs for treatments affecting any part or function of the body.”
In order to adhere to IRS classifications, you might want to divide your medical expenditures into three categories:
- Short-term Diagnosis
- Short-term Treatment or
- Long-term Treatment.
Tax deductions for caregivers are for out-of-pocket expenses related to the aforementioned. The tax for seniors applies to dental care, transportation to medical appointments, premiums and so forth (see IRS Publication 502 “Deductions for Medical & Dental Expenses”).
Both the senior and caregiver can qualify for deductions, but their thresholds and qualifying criteria are different. For example, tax benefits for seniors must exceed 10% of their adjusted gross income when they are under the age of 65; it must exceed their adjusted gross income by 7.5% if they are aged 65 or older.
The tax credit for caregivers is applicable when you pay more than 50% of your relative’s care. If there are several relatives providing care, then they might need to fill out a Multiple Support Declaration to decide who receives the benefit. You might want to hire a lawyer to help you complete this complicated legal document.
Long-Term Medical Expense Deductions
Generally, if you care for a senior deemed to be chronically ill, you might qualify for a caregivers tax credit for long-term medical expenses. The IRS definition for chronically ill is when seniors cannot perform 2 of the following functions, by themselves:
- Using Restroom
But, the IRS wants you to have a licensed healthcare practitioner prescribe a long-term care plan. Any preventative, diagnostic, therapeutic, maintenance or personal care expenses related to treating, rehabilitating or mitigating a chronic ailment, illness or disease might be deductible (see IRS Publication 554 for more information).
Caregiver & Long-Term Care Deductions
Tax breaks for caregivers might also be possible if you pay someone’s long-term care insurance premiums. This might qualify as a deductible medical expense. But, you must have a renewable insurance contract and a cash surrender value must not be provided in the policy.
Furthermore, any refunds (besides those for dividends, cancellation, surrender or death) can only be used to reduce premiums or increase benefits. There might also be state tax benefits for caregivers. A tax credit for caregivers is also available if the senior is chronically ill due to a cognitive challenge.
Employment Taxes for Hired Caregivers
Tax tips for seniors include those who hire caregivers, private health aides or nursing assistants. The 2018 threshold for paying state and federal employment taxes was $2,100 for the year or $1,000 for a quarter. If you paid relatives, you don’t have to pay employment taxes on those wages.
You must also pay unemployment taxes for caregiver employees. If a placement agency provided the worker, then they are considered the employer and responsible for the unemployment tax (for more information, see IRS Publication 926). Most importantly, this is not to be considered financial or legal advice; for specific concerns, you should contact an accountant or attorney.