The federal government postponed the date to file 2019 federal income tax returns to July 15, 2020. Many tax professionals advised their clients to wait to file their returns until the last minute. With the due date right around the corner, we wanted to make our readers aware that senior care costs may be tax deductible. For the 2019 tax year, there are two broad programs under which senior care costs may be tax deductible, the Federal Tax Credit for Other Dependents and the Dependent Care Deduction. This post will explain at a high level what these two programs are and how a family may qualify for them. To determine whether it’s better to file under one program or the other, consult your tax professional.
Before proceeding, it’s important that our readers know the difference between a tax credit and a tax deduction. A tax credit reduces the taxes owed whereas a tax deduction reduces the taxable income upon which taxes due is calculated. The first program we will talk about is a credit and it is called the Federal Tax Credit for Other Dependents.
The Federal Tax Credit for Other Dependents permits basic care, which may allow the taxpayer to work elsewhere or to find work instead of caring for a dependent. The credit can be up to $3,000, but there are few permissible expenses-namely, household services such as cooking and cleaning and adult day care. Expenses that you incur to help your loved one with his or her ADLs or skilled needs are not eligible for the credit under this program. The IRS limits the credit to expenses incurred on dependents only. The IRS rules say that a dependent must have been physically or mentally incapable of self-care and must have lived with you for more than half the year.
The other program under which a family may deduct senior care costs is the Dependent Care Deduction. Under this program, taxpayers may deduct qualifying medical and dental expenses from their taxable income to reduce the base on which their taxes are calculated. The expenses that people can deduct are calculated by multiplying their adjusted gross income by 7.5% and subtracting that number from their total qualifying medical and dental expenses. It is worth noting that the percent will go up to 10% in 2020, but for 2019 it remains at 7.5%. Qualifying medical and dental expenses is a broad term by the IRS, but for purposes of this post we will only highlight the permitted expenses that are relevant to senior care. For home care or assisted living expenses to qualify, your loved one must be considered “chronically ill” by a professional. That typically means he or she can’t do two of the six activities of daily living (transferring, walking, using the restroom, bathing , dressing, and eating) or he or she has been diagnosed with some form of dementia. If deemed as chronically ill by a professional, only the expenses associated with care, such as personal care, skilled care, and medication help are tax deductible. Food, lodging, and other non-medical related expenses are not tax deductible. For a more detailed explanation on what expenses are tax deductible and which ones are not, you may review the IRS publication on Medical and Dental Expenses or consult your tax professional.
There is a third program by which you may save on medical expenses for an aging loved one and it’s through flexible spending accounts (FSA) or health savings accounts (HSA). These are tax savvy savings accounts, which are set up through health insurance plans and allow people to spend pre-tax dollars on permissible medical expenses. What are considered permissible expenses depends on your employer’s plan. For purposes of this post, we will not expand any more on these accounts because they can differ so much by plan to plan, but generally the medical expenses need to be spent on you, an immediate family member, or a dependent. If you want to know more about these plans, talk to your benefit provider. We just wanted you to be aware that it is possible to save more money on taxes through these two mechanisms.
The tax code can be tricky, but if understood, it can benefit you and your loved one. As always, consult the tax code or your tax professional before filing. We do not claim to be tax experts. The reason for this post is to highlight a few programs that can possibly help you save money on senior care expenses.