Whether you are relatively new to caregiving or have been in this role for years, you do many things to ensure that your loved one receives the support they need. An important aspect of this process that should be considered sooner rather than later is tax preparation. Getting an elder’s financial affairs (and your own) in order early on is an essential step that can be particularly helpful as tax day approaches.
Get Organized from the Get-Go
Every taxpayer should develop a personal organizational system to manage the important financial documents, forms and receipts they receive throughout the year. There’s no one-size-fits-all approach to staying organized, 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 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
- W-2 forms
- 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
Many entities including banks and other financial organizations now offer digital or paperless forms and statements. Making a digital file for these documents on the computer can help save space by replacing paper files or serve as a back-up in case hard copies are damaged or lost.
Stay on Top of Relevant Tax Information and Changes
The United States Tax Code is tens of thousands of pages long and contains an enormous 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 the 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 You Can Claim an Elderly Parent As a Dependent
Claiming a parent (or other qualifying relative) as a dependent can entitle you to additional tax credits (and tax deductions like their medical expenses if you choose to itemize).
The Internal Revenue Service sets forth the following rules for claiming a dependent who is not a child:
- You can’t claim any dependents if you (or your spouse if filing jointly) could be claimed as a dependent by another taxpayer.
- You can’t claim a married person who files a joint return as a dependent unless that joint return is filed only to claim a refund of withheld income tax or estimated tax paid.
- You can’t claim a person as a dependent unless that person is a U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico.
- You can’t claim a person as a dependent unless that person is your qualifying relative.
A relative must pass the following tests to be considered a qualifying relative:
- The person either must be related to you (e.g. parent, parent-in-law, stepparent, grandparent, sibling, other direct relative) or must live with you all year as a member of your household. (Temporary absences for you and/or your dependent are permitted for things like illness, vacation, business and, in some cases, indefinite stays in skilled nursing facilities.)
- The person’s gross income for the 2019 tax year must be less than $4,200.
- You must provide more than half of the person’s total support for the year. (Total support includes amounts spent to provide food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities for a dependent.)
Determine if You Can Claim the Other Dependent Credit
The 2017 Tax Cuts and Jobs Act eliminated personal and dependent exemptions starting in 2018 but increased the standard deduction and created the Credit for Other Dependents. A filer can claim up to a $500 tax credit for each qualifying other dependent.
A care recipient qualifies you for the ODC if they meet all the following conditions:
- They are claimed as a dependent on your tax return.
- They cannot be used by you to claim the Child Tax Credit or Additional Child Tax Credit.
- They are a U.S. citizen, U.S. national or U.S. resident alien.
Determine if You Can Claim the Child and Dependent Care Credit
You may also be able to take advantage of the separate nonrefundable 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. Dependent care expenses must be for a “qualifying person” who meets one the following criteria:
- They are your spouse, who was physically or mentally incapable of self-care and lived with you for more than half of the year; or
- They are an individual who was physically or mentally incapable of self-care, lived with you for more than half of the year, and either:
- Was your dependent; or
- Could have been your dependent except that:
- They received gross income of $4,200 or more,
- They filed a joint return, or
- You (or your spouse, if filing jointly) could have been claimed as a dependent on another taxpayer’s 2019 return.
Note that your spouse, your child who is under the age of 19, or a dependent whom you or your spouse may claim on your return do not count as valid paid care providers for this credit.
Determine if Your Loved One Needs to File Taxes
An elder may not need to file a personal income tax return depending on their age, gross income, filing status and whether they are 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/or does not have to file their own tax return this year, a copy of their most recent 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 Caregivers with POA
If you have already been granted financial power of attorney (POA), you may be able to sign your loved one’s tax return if it falls under the specific powers outlined in the POA document. In order to do so, you must file Form 2848 (Power of Attorney and Declaration of Representative) along with a copy of the non-IRS POA document.
A senior who is still competent and wishes for a family member to handle their tax preparations but has not completed a financial POA will also need to file Form 2848. It’s important to note that this form will ONLY grant the family member the power to act on their behalf before the IRS. It will not grant any other financial powers on behalf of the elder.
Sometimes it can be difficult to ensure that the IRS will accept a non-IRS POA, so seeking help from the attorney who prepared the POA document may be worthwhile.
Seek Help with Tax Preparation
For assistance with basic questions like deciding who you can claim as a dependent and who must file a tax return, visit the IRS website to use their Interactive Tax Assistant tool. These brief online interviews can help you through some of the basic tax questions that arise for many family caregivers each year. There are also several sources that provide free tax preparation help, tax tips and other financial advice for seniors and their caregivers.
Sources: Publication 501 (2019), Dependents, Standard Deduction, and Filing Information (https://www.irs.gov/publications/p501#en_US_2019_publink1000250285); How did the Tax Cuts and Jobs Act change personal taxes? (https://www.taxpolicycenter.org/briefing-book/how-did-tax-cuts-and-jobs-act-change-personal-taxes ); Topic No. 602 Child and Dependent Care Credit (https://www.irs.gov/taxtopics/tc602); About Form 2848, Power of Attorney and Declaration of Representative (https://www.irs.gov/forms-pubs/about-form-2848)