Whether you are relatively new to caregiving or have been in this role for years, you do many things to ensure your loved one receives the support they need. An important aspect of this process that should be considered sooner rather than later is filing taxes. Getting an elder’s financial affairs (and your own) in order early on will help you avoid unnecessary stress as tax day approaches.
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 method will be unique. You may prefer a simple three-ring binder to house all your paperwork or opt for filing cabinets of meticulously labeled hanging folders. Regardless of what type of system works best for you, having everything 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
Most entities including banks and other financial organizations now offer 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 Current on Tax Information and Changes
There can be tax implications for those on both sides of the caregiving equation, so it’s important to read up on tax laws that could impact how you and your loved one file. You may have a handle on your own finances and tax prep, but the world of elder care has its own set of rules and conditions. Understanding these distinctions will help you take advantage of certain opportunities to lower your tax bill and prevent you from making costly mistakes. If there’s something you don’t fully understand, don’t hesitate to consult a tax professional.
Determine if You Can Claim Your Care Recipient As a Dependent
If you can claim an elderly loved one as a dependent, you may qualify for additional tax credits (and tax deductions like their medical expenses if you choose to itemize). It’s possible to claim a parent, other relatives (e.g., a parent-in-law, grandparent, sibling), and even nonrelatives who are members of your household as dependents if they meet certain criteria.
Determine if Your Loved One Needs to File
An elder may not need to file a federal 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.
To find out if you or someone you care for is required to file a federal tax return or should file to receive a refund, use the IRS “Do I Need to File?” tool. Additionally, don’t forget about any state and local income taxes that may be owed!
Get a Copy of Your Loved One’s Most Recent Tax Return
Even if your loved one can be claimed as a dependent and/or does not have to file their own tax return this year, obtaining a copy of their most recent filing(s) can provide an important reference point to help you determine the forms and information that must be considered when filing future returns.
Taxpayers can access personal tax records online (fastest option) or request tax returns and transcripts by mail.
IRS Authorizations for Caregivers
There are different types of third-party authorizations that the IRS permits, each of which is different in scope and purpose.
Non-IRS power of attorney (POA) documents are recognized, but a caregiver with a valid non-IRS financial POA (known as the agent) must submit proof of their authority to represent their loved one (known as the principal). An agent must file Form 2848 (Power of Attorney and Declaration of Representative) along with a copy of the non-IRS POA document. Unless specifically prohibited, a general POA for finances allows an agent to represent a principal in all tax matters before the IRS. This only includes signing a tax return on the principal’s behalf in certain circumstances, such as the principal being unable to sign due to illness or injury. Note that only a durable non-IRS POA document will remain in effect if the principal becomes incapacitated or incompetent. Otherwise, the POA will be terminated.
A competent senior who wants a family member to handle their tax preparations but has not completed a non-IRS POA will need to sign and complete Form 2848 with their chosen representative. It’s important to note that submitting this form will ONLY grant the representative the power to act on their behalf before the IRS. It does not grant any other financial powers.
Sometimes it can be difficult to ensure that the IRS will accept a non-IRS POA, so requesting help from a tax specialist or the attorney who prepared the document may be worthwhile.
Seek Help With Tax Preparation
For assistance with basic questions, visit the IRS website to use their Interactive Tax Assistant tool. These brief online interviews can help you through some of the common 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.