Whether you are relatively new to caregiving or have been caring for an aging loved one for years, you do many things to ensure that they receive the support they need. An important aspect of this process that should be considered sooner rather than later is tax preparation. Getting financial affairs in order in advance is an essential step that can be particularly helpful come tax day in April.
Get Organized from the Get-Go
Every taxpayer should develop a personal organizational system to manage the important financial forms and receipts they receive throughout the year. There's no one-size-fits-all approach to organization, so each person's system will be unique. You may prefer using color-coordinated binders or opt for filing cabinets of meticulously labeled hanging folders. Regardless of what type of system works best for you, having all your paperwork sorted and easily accessible will make filing infinitely easier.
As a caregiver, you may also need to assume responsibility for organizing your loved one's financial documents. If necessary, start a separate set of tax files for them as well. Important items to keep track of include:
- Annual bank statements
- 1099 forms
- Payroll stubs
- Dividend distribution and gain and loss statements
- Donation receipts
- Closing statements from real estate transactions
- Receipts from any taxes paid throughout the year (estimated or quarterly)
- Receipts from any medical expenses that may be tax deductible
Stay on Top of Relevant Tax Information and Changes
The United States Tax Code is tens of thousands of pages long and contains an astronomical amount of information—too much for even the savviest tax professional to know, let alone the average taxpayer. That's why it's especially important to read up on all possible tax implications of looking after an elderly loved one. You may have a handle on your own finances, but the world of elder care has its own set of rules and conditions. Understanding these distinctions can help you take advantage of certain opportunities to decrease your tax bill and prevent you from making costly mistakes. If there is something that you do not fully understand, don’t hesitate to consult a tax professional.
Determine if a Loved One Can Be Claimed as a Dependent
Claiming an aging loved one as a dependent can entitle you to deduct additional expenses from your taxable income. You may also be able to take advantage of the Child and Dependent Care Credit if you must pay someone to care for your dependent elder so you can go to work or look for employment.
Determine if a Loved One Needs to File
Depending on their age and income, an elder may not need to file a personal income tax return. This may be true even if they are not being claimed as a dependent. There are specific income limits that dictate whether a senior has to file, but remember that Social Security benefits are considered tax-exempt income in most cases.
Get a Copy of Your Loved One's Most Recent Tax Filing
Even if your loved one can be claimed as a dependent (and thus doesn't have to file a separate return for themselves), a copy of their most recent tax filing can provide an important reference point to help you determine the forms and information that need to be considered when filing future returns.
Additional Steps for POA
If you have been granted financial power of attorney (POA) over an elderly loved one's affairs, you may be able to sign your loved one’s tax return, depending on the specifics outlined in the POA document. For a POA to have access to a senior's financial information and communicate with the IRS on their behalf, Form 2848 (Power of Attorney and Declaration of Representative) may need to be filed.
It can be difficult to ensure that the IRS will accept a POA document, so seeking help from a knowledgeable tax professional may be worthwhile.