Stressed About Aging Parent Care Costs? Here’s How Tax Breaks Can Help

May 6, 2024

Michael Landsberg, CIO, Landsberg Bennett Private Wealth Management

Caring for aging parents is a reality faced by millions of Americans. It’s a time filled with both love and significant challenges. Juggling work, family life, and the changing needs of a loved one can be emotionally draining. But it usually boils down to the family: finding the wherewithal for elder care.

The costs can really add up for the caring of aging parents. Monthly costs of assisted living facilities are between several thousand dollars to just over $10,000, depending on location and level of care provided. In-home care services provide the most flexibility but still come at a high price. Even more urgent are the medical expenses, which are usually on the hike for seniors and they can easily strain a family’s budget.

What can be even more overwhelming is the added dimension of financial stress that piles on top of all the emotional strain there is when you care for a loved one. It can lead to some tough decisions on either delaying retirement, reducing savings, or even going into some debt.

Happily, they may not be alone. The Internal Revenue Service offers a variety of breaks and benefits specifically targeted to help those who are caring for dependents, including aging parents.

These tax breaks can indeed ease the financial burden to a certain extent in elder care. They are, in a real sense, offering breathing space to a common person during testing times. That translates into potential tax savings ranging from a few hundred to several thousands, depending on an individual’s circumstances and the type of care your parent might need. In this article, we will walk you through the tax breaks that could help you manage the cost of caring for your aging parent. We will explain the eligibility requirements, potential benefits, and how to claim these deductions and credits on your tax return.

We will also be looking at how valuable a fiduciary financial advisor can be, just to help ensure that you’re actually going to be getting the most out of the tax benefits that are provided in your specific situation.

Claiming Your Parent as a Dependent: Understanding the Eligibility

Many of the tax breaks designed to help ease the financial burden of caring for aging parents rest on a key factor: can you claim your parent as a dependent on your tax return? The IRS is not all that bad, actually, because they give us a guide on how to determine eligibility. So, let’s get to learn these requirements.

• Citizenship Status:  Your parent must be a U.S. citizen, resident alien, or a resident of Canada or Mexico.

• Filing Status: Your parents can’t be married and file a joint tax return.

• Residency: This is one place to push for your luck. Though living with you over half of the year is encouraged, it may not be a big necessity. If a parent falls under the “qualifying relative” (blood relative, stepparent, or father/mother-in-law) category, residency requirements can be waived.

• Income Limits: Total income of your parents or parents should be less than $4,700 (except that a part of the Social Security benefits might count as income).

• Financial Support: This is where it gets a little tricky. In order to qualify as a dependent, you have to provide more than half of the total support during the year for the said individual. This support covers money spent on food, shelter, clothing, medical care, and other necessary expenditures.

Understanding these is critical, but the tax codes can be complex. For a more detailed look on how to claim a dependent, look to the IRS Publication 501, “Dependents, Standard Deduction and Filing Information.”. That’s something one could determine through the filing process or use the helpful online tool “Whom May I Claim as a Dependent?” on the IRS website.

Sources:

About Publication 501, Dependents, Standard Deduction, and Filing Information

Whom may I claim as a dependent?

Tax Breaks for Supporting Your Aging Parents

Navigating the financial burden of caring for an aging parent can feel overwhelming. The U.S. tax code offers a variety of breaks specifically designed to help alleviate some of these costs. Such tax breaks could be in the form of credits that directly reduce the tax you owe to the government, while others would be in the form of deductions that lower the income you are supposed to pay tax for. The following are some of the most applicable tax breaks you can use to relieve the financial pressure that comes with caring for your aging parent.

The Child and Dependent Care Credit for Elder Care

It might appear like the Child and Dependent Care Credit (CDCC) is only targeted at childcare, but guess what? It carries some great news for the family carrying out the responsibility of caring for their aging parents. That’s where the CDCC comes in: for certain situations, it can provide an essential offset for elder care. How does it work, and how on earth can it benefit you?

Eligibility for the CDCC and Elder Care

The most important aspect that unlocks the CDCC for elder care is the need your parent has that requires care. They should meet the criteria below for eligibility:

• Inability to Care for Themselves: When the chronic condition is such that it doesn’t leave the person in a state where he/she can’t even take care of himself/herself, then it’s supposed to leave the person in a state where he/she can’t carry out normal functions of daily living. This points to the requirement for assistance in activities of daily living (ADLs), which comprise bathing, dressing, eating, toileting, and transferring (movement from sitting to standing, or the other way around).

• Living Arrangements: There are two main scenarios for living arrangements:

• Living With You: In any event, the earlier part of the year should indicate living with either of the parents. This clearly shows the household and definitely proves that the person is into the role of a caregiver.

• Exceptions for Qualifying Relatives: This can be an exception if he or she lives in another place; however, if your parents are “qualifying relatives” (blood relatives), father or mother-in-law, or stepparent.

Credit Details and Limitations

The CDCC is the percentage of your qualified child and dependent care expenses, with a cap on the total amount you can claim. The following are the details:

• Credit Percentage: Your Adjusted Gross Income (AGI) will determine the percentage of credit you will receive. The lower your AGI, the higher the percentage of credit you will receive, generally ranging from 20% to 35%.

• Credit Limit: This applies a cap to the uppermost amount of qualified expenses that can be claimed for credit. For 2023, the cap is $8,000 if one has one qualifying dependent (parent) and $16,000 for two or more qualifying dependents.

• Taxable Income Impact: The credit simply works to reduce your amount of income tax that you owe. It actually serves as a dollar-for-dollar reduction of your tax liability.

Example: Using the Child and Dependent Care Credit for Elder Care

For example, say you pay a home care service $4,000 a month to help an aging parent needing assistance with bathing, dressing, and management of medication. If you add up all these amounts over the whole year, then the total qualified expenses for taking care of elders throughout the year are $48,000. But the credit limit is not allowed to go beyond $8,000.

Here’s how the CDCC might benefit you

• Eligible Expenses: Since your parent meets the criteria of ADLs, then the $48,000 in caregiving expenses would most likely qualify under the CDCC.

• Credit Calculation: Assuming your AGI would place you at the level of income that falls within a 35% credit percentage range. Under this scenario, the amount of credit would be 35% of $8,000, or the uppermost allowance for expenses of one dependent, which amounts to $2,800.

• Tax Impact: The $2,800 CDCC directly reduces your tax liability by $2,800. This will lower your taxes payable or increase your tax refund.

The example is an oversimplification, but it does help illustrate the importance of discussing with a tax professional your particular eligibility and the most advantageous way to claim the CDCC for your situation.

Flexible Spending Accounts (FSAs) for Elder Care Costs

Managing the expenses of providing care to your elderly parents often seems like juggling balls and trying to ensure none of them drop. Do not despair—Flexible Spending Accounts (FSAs) provide yet another tax-advantaged means to help cover these costs.

Understanding Dependent Care FSAs

The Dependent Care FSA is an employer-sponsored benefit account that allows you to set aside pre-tax dollars from your paycheck to pay for qualified expenses.

That is to say, the funds paid in the FSA come from your paycheck before taxes are subtracted, reducing your taxable income. You’re basically prepaying in advance for a discount on some qualified caregiving expenses.

Dependent Care FSAs and Elder Care

The great thing is, if eligible, Dependent Care FSAs may be used to cover a wide range of elder care expenses.

• Qualifying Dependent: Your parent must be considered your qualifying dependent per the IRS. We went into detail on these requirements above when discussing the Child and Dependent Care Credit, but generally, your parents couldn’t be married filing jointly, has income limits that must be met, and should receive more than one-half of their financial support from you.

• Need for Care: It is a must that, similar to the CDCC, parents be in need of support with ADLs due to a chronic condition.

Benefits of Using a Dependent Care FSA for Elder Care

• Reduced Taxable Income: By using pre-tax dollars towards your FSA, you reduce your taxable income; this could mean significant relief in taxes.

• Triple Tax Advantage: In simple terms, these accounts carry a “triple tax advantage.” Your contributions are made with pre-tax dollars, so they lower your reportable income. The funds grow inside the account on a tax-free basis. And, qualified withdrawals to pay for elder care are not taxed. This arrangement not only helps manage costs efficiently but also maximizes your financial resources in supporting elder care needs.

Contribution Limits and Considerations

A Dependent Care FSA has an annual contribution limit. For 2023, the limit is $5,000 for married couples filing jointly, and $2,500 for single filers or married couples filing separately.

Important Note: Depending on your employer’s plan, any funds that remain in the Dependent Care FSA at the end of the year may be forfeited; this is different from the CDCC. It is therefore crucial to make a careful estimate of what you will likely spend on elder care throughout the year to avoid over-contributing and potentially losing out on tax savings.

Dependent Care FSAs offer significant benefits, though navigating the tax rules can be complex. It is advisable to consult with a tax advisor to help ensure you are using your Dependent Care FSA effectively for your specific situation.

Credit for Children and Other Dependents for Elder Care

The world of tax breaks can seem intimidating, but don’t let that keep you from exploring the potential benefits of the Credit for Children and Other Dependents. Although the name suggests it’s only for child dependents, there’s excellent news for families caring for aging parents.

A Lifeline for Elder Care Costs

The Credit for Children and Other Dependents provides a tax credit of $500 for each dependent you claim on your tax return if they are eligible. This credit can be particularly beneficial for those caring for dependent parents who do not qualify for the Child and Dependent Care Credit (CDCC).

Eligibility for the Credit for Other Dependents and Elder Care

There are two main factors to consider when determining eligibility for this credit and its applicability to elder care:

• Qualifying Dependent:  According to the IRS, your parent must be considered your qualifying dependent. We have reviewed these requirements earlier, but to reiterate, your parents generally cannot be married and filing jointly, must meet income limitations, and receive more than half of their financial support from you.

• Age Requirement: Unlike the CDCC, the Credit for Other Dependents has no age limit. This makes it a valuable option for adult children caring for dependent parents, offering a way to reduce their tax burden while managing elder care responsibilities.

Credit Details and Potential Benefits

While the CDCC offers a percentage back on your qualified caregiving expenses, the Credit for Other Dependents operates differently. Here’s a breakdown of how this credit functions:

• Flat Credit Amount: The IRS sets a specified dollar value for the credit amount for each qualifying dependent, which may change annually. For the year 2023, this amount is set at $500 for each qualifying dependent.

• Taxable Income Impact: Like other tax credits, the Credit for Other Dependents reduces your tax liability dollar-for-dollar. Essentially, the credit amount directly decreases the amount of income taxes you owe. This direct reduction can provide significant relief in your overall tax situation.

Example: Leveraging the Credit for Other Dependents for Elder Care

Let’s say you pay $3,000 each year for adult daycare services for your parent and dependent, who is your aging parent. Although such expenses do not qualify for the CDCC because your parent does not need assistance with ADLs in your home, they qualify as dependent care support.

 Some benefits may include the following:

• Eligibility: Your parent satisfies the test for a qualifying dependent, allowing you to claim your parent on your tax return.

• Credit Amount: The credit amount is $500 for each qualifying dependent for the year 2023.

• Tax Impact: The $500 credit lowers your tax liability on a dollar-for-dollar basis. In other words, you owe that much less in taxes or receive that much more in a tax refund.

Important Considerations

While this credit can assist you in saving tax, it is crucial to remember that the credit amount is still limited. Moreover, the credit may be phased out altogether for high-income earners. Therefore, it may be beneficial to work with a tax practitioner to determine the most suitable tax benefit available in your circumstance.

Medical Expense Deduction

With the cost of medical bills growing, particularly when taking care of older residents, the tax code may help. Let’s discuss how the Medical Expense Deduction definition may help you on elder care issues.

Qualifying for the Medical Expense Deduction and Elder Care

On parent’s elder care, two requirements must be satisfied to include the Medical Expense Deduction:

• Qualifying Dependent: The parent must be a legally dependent as described by the IRS. This means that generally, they cannot be married and submit a joint return, have an income limit, and collect more than 50% of their financial support from you.

• Medical Expense Threshold: There is a hurdle to clear regarding this deduction. You may apply a qualified expense deduction for medical insurance and other costs if it exceeds a certain amount of your adjusted gross profits. For 2023, this annual bill must be more than 7.5 percent of your AGI.

Examples of Potentially Qualifying Elder Care Expenses

A wide variety of elder care costs may be qualifying for the Medical Expense Deduction, provided they meet the case’s “ordinary and necessary” requirements. Some examples include:

• Costs related to chronic conditions: treatment, medications, and doctor visits for your parent’s chronic health conditions – diabetes, heart disease, Alzheimer’s, etc.

• Adult daycare containing a medical component: if the facility provides some actual medical services at their daycare facility, such as medication management, physical therapy, etc., a percentage of your payments might be deductible.

• In-home nursing care: costs for a direct service provider to your parent’s house might be qualifying for the tax deduction.

• Medical devices: wheelchairs, oxygen tanks, hospital beds, and other equipment are qualifying if prescribed as necessary.

Important Considerations and Recommendations

• Recordkeeping: you must document each of your parent’s qualifying medical-related spending throughout the year to claim for a deduction on your tax return. If the information is not supported by invoices and receipts, it won’t qualify.

• Tax professional advice: a professional tax advisor can provide you with questions, especially when it comes to gathering all of the expenses under one requirement – a case that is complicated and unusual.

• Changes in tax codes: the government may change the eligibility requirements for the Medical Expense Deduction yearly.

Altogether, while exceeding the threshold of many expenses and having to juggle so many at once might be preclusive, the Medical Expense Deduction might save you a whole lot of money when it comes to caring for your aging parent. Consulting with a professional advisor could make sure that you do it correctly.

Why a Fiduciary Financial Advisor Can Be Your Ally in Managing Elder Care Costs

Dealing with an elderly parent’s needs is deeply emotional and financially demanding. Thankfully, tax breaks can ease some of that financial strain, but the tax code can be tricky to handle alone.

Fiduciary Duty: Putting Your Needs First

Fiduciary advisors are different. They must put your needs above all else because the law says so. Their advice aims directly at what’s optimal for your financial situation, not their paycheck. This makes them invaluable when trying to use tax benefits for elder care costs effectively.

Making Sense of Elder Care Tax Breaks

The tax rules for elder care benefits are filled with complicated exceptions and requirements. A good financial advisor will:

• Find the Optimal Tax Breaks for You: Your situation is individual, and some tax breaks will fit your needs better than others. Your advisor keeps tabs on the latest changes in the tax laws and picks the breaks that benefit you most, like the Child and Dependent Care Credit or the Medical Expense Deduction.

• Look at Your Whole Financial Picture: They’ll look at your earnings, what you spend, and your overall financial health to pinpoint which tax breaks can make a real difference for you.

• Plan Your Tax Strategy: It’s about more than just claiming deductions; it’s about claiming them smartly. For example, your advisor might suggest timing your medical expenses to meet certain deductions, helping you save more at tax time.

Walking You Through the Claim Process

Tax forms and filing procedures can be really daunting, so having a financial advisor can be immensely helpful. They guide you through acquiring the necessary documents to make proper claims for the tax breaks you’re entitled to, ensuring everything is well-documented and filed accurately. This can save you time, reduce aggravation, and possibly even prevent costly mistakes on your tax return.

Beyond Tax Breaks: Holistic Financial Planning

The benefits of having a fiduciary financial advisor go beyond merely helping you navigate tax breaks for elder care. They can assist you with:

• Long-term Care Planning: Developing a comprehensive plan to cover potential future elder care expenses.

• Retirement Planning: Tailoring strategies to help ensure your retirement savings stay on track, while also considering the care of your parents.

• Investment Strategies: Recommending investment strategies that align with your future financial goals and risk tolerance, helping to ensure a balanced approach to your financial health.

Finding the Right Fiduciary Advisor

When choosing a fiduciary financial advisor, look for someone who specializes in elder care planning and has experience working with families in similar situations.  Seek out an advisor who is certified as a Certified Financial Planner™ (CFP®) or a Chartered Retirement Planning Counselor (CRPC®) designation.  Schedule consultations with several advisors to find someone you feel comfortable with and who clearly explains your options.

Caring for an aging parent is a journey filled with both love and challenges.  By leveraging the available tax breaks and partnering with a qualified fiduciary financial advisor, you can ease the financial burden and focus on what matters most:  providing quality care for your loved one.

Wrapping up

While tax breaks can’t eliminate all the costs associated with caring for an aging parent, they can offer significant financial relief.  The Child and Dependent Care Credit, Dependent Care FSAs, the Credit for Other Dependents, and the Medical Expense Deduction are all valuable tools at your disposal.  Remember, navigating the tax code and maximizing these benefits can be complex. 

Consider consulting with a tax advisor, especially a fiduciary financial advisor who is legally obligated to act in your optimal interest. They can help you understand which tax breaks apply to your situation and help ensure you claim them accurately.

For more information on elder care resources, you can visit the IRS website or the National Association of Area Agencies on Aging website.  Remember, you’re not alone in this journey. By seeking professional guidance and utilizing available tax breaks, you can better manage the financial challenges of caring for your loved one.