Most Americans want or need to care for their elderly parents or relatives who require medical or other (functional) care. Retirees often refuse to move into expensive nursing homes and remain at home but require less expensive care when provided by a relative rather than an outsider.
Such care can be both satisfying and costly.
If you don’t know about the tax credits and deductions owed, you won’t be able to save on your emerging and growing income.
Here are some tips for you. This information is not exhaustive and has many nuances, exceptions, and additional rules. So get advice from a lawyer or qualified accountant if you need to take advantage of tax benefits.
Listing your elderly parents as dependents on your tax return is more complicated than a child, as there are several requirements:
- The parent must have shared your primary residence with you for more than six months
- The dependent’s gross income for the year must be less than $4,300,
- You (and your spouse, if filing jointly) are not dependent on the other taxpayers.
- A parent does not file a joint return with their spouse. The exception is filing a joint return to claim the estimated tax paid or income tax withheld.
- The dependent must be a U.S. citizen/foreign national-U.S. resident/resident of Canada, Mexico, or the Republic of Panama.
- You have paid at least half of the parent’s alimony for the year.
- Foster parents must live with you like a family member in your home for one year.
- The dependent must be mentally or physically incapable of caring for themselves.
A person will be considered physically or mentally incapable of self-care by the state if the person is unable to provide for the nutritional and personal hygiene needs or requires constant supervision by somebody else as a result of a physical or mental disability for the safety of the person or bystanders.
Because you can provide both in-home and out-of-home care, you will consider the costs directly related to the dependent first.
It means that you should separate care expenses from expenses for other purposes. The number of dependent care expenses can be reduced by the number of benefits your employer paid that are excluded from your gross income. You can exclude no more than $10,500 from the number of benefits shown. The expenses you want to take into account must not exceed the amount of your earned income or your spouse’s earned income, whichever is less.
If your dependent falls under “medical dependent” status, you can include all medical expenses along with your medical deductions when you complete your return.
The criteria for qualifying as a dependent for medical dependency status are much less stringent. A person will be considered a medical dependent by the state if you provide more than 50% of the necessary support. This amount of care also includes medical expenses. Only if your medical expenses reach 7.5% of your adjusted gross income can you deduct them for tax purposes. There are limitations on the amount of the deduction, which depend on the age of the dependent. For example, in 2022, that amount is $5,640 if you care for someone over 70.
You can plead a deduction for the portion of expenses incurred during the tax year that you paid for that were not reimbursed to you by insurance or other means. Such costs are deductible only if the parent was a dependent when the medical services were provided or when you paid the expenses.
Use the information in paystubs to correctly calculate your taxable income and the number of tax credits and deductions.
A tax credit for a dependent
What is a tax credit? It is an amount of money the government gives you to reduce your tax liability. You will not get this money in your hand. They only decrease the tax burden that is placed on you. It indicates that if you received a $1,000 tax credit and you have to pay $700 in taxes at the end of the year, your liability to the state will be reduced to zero, but the $300 remaining will not become yours.
In this instance, the tax credit is not refundable.
Your dependent parent must live with you to receive the tax credit. In addition, the parent must be incapable of self-care, either physically or mentally.
The tax credit is most important for people who work and pay others to care for their parents. Using the tax credit allows you to take advantage of your free time, realize your high income skills, and get increased wages and solid paystubs.
The tax credit amount depends on the gain level but is limited to $3,000 of expenses per person and $6,000 for two people.
Hiring a third person
Many people are looking for somebody they can hire to take care of their parents so they can work and earn money.
Such employees can be caregivers, nannies, nurses, and au pairs.
Hiring such an employee also has its tax implications.
The employer and the worker must pay Medicare and Social Security taxes if a domestic worker gets a salary of at least $2,100. The amount of such tax is 7.65% of the wages shown on the paystub. It is apportioned as follows: 1.45% for Medicare and 6.2% for Social Security. The employee’s taxes are paid from their paycheck.
As with any law, there are exceptions as well. The above taxes are not payable if the employee is:
- The employer’s spouse;
- A child under 21 years of age,
- A parent
- An employee under the age of 18.
Such work does not have to be their primary occupation.
If the domestic worker’s wages exceed $200,000, an additional 0.9% Medicare tax is charged.
The above rules for taxes, benefits, and deductions are not exhaustive, but they are enough to familiarize you with your rights and responsibilities. Among other things, it’s also vital to educate yourself on the rules for hiring a domestic assistant or filing tax information on domestic workers. You can also request a lawyer or tax advisor for help with this.