Putting a loved one in a nursing facility has always been a difficult choice for many clients. In the wake of the COVID-19 pandemic, even more clients are viewing this choice only as the last resort. The pandemic spread rampantly through nursing homes, creating significant — and largely justified — fears for those seeking long-term care for loved ones. The result has been a renewed interest in in-home care options.
For many, that means providing care for their loved ones in their own homes and funding home health aides who can help with medical care and with everyday activities such as cooking and cleaning.
While coordinating in-home care for a loved one can be a challenge, clients should be advised that a number of valuable tax benefits exist to help clients offset the cost of care.
Does the Individual Qualify as a Dependent?
Many federal tax breaks depend on whether the person receiving care qualifies as the caregiver's dependent. If your client is caring for a family member who qualifies as a dependent, the client may be entitled to deduct the dependent's medical expenses and claim other valuable tax benefits.
To qualify as a dependent, the person receiving the care must have gross income that doesn't exceed $4,300 (in 2021; the amount is adjusted for inflation each year) and can't file a joint return unless the return is filed only to receive a tax refund (and no taxes are owed). But Social Security benefits aren't included. Most types of investment income, including traditional retirement account distributions, will be included in calculating gross income.
This income test is important. With proper tax planning, tax-free sources of income (such as a Roth account) can be leveraged to reduce the person's taxable income. It may also be possible to use a qualified charitable distribution (QCD) to satisfy required minimum distribution requirements while minimizing taxable income.
In addition to satisfying the income test, the client must provide at least half of the person's support for the year — considering housing, food, clothing, transportation, education, recreation and other necessities.
In some situations, more than one caregiver may provide support for the individual, but no single person provides 50% of the support. For example, siblings might agree to pool their resources to support a loved one.
When each party provides at least 10% of the dependent's support and the combined amount of support is at least 50%, only one caregiver can claim the person as a dependent. According to IRS Publication 501, the parties providing support must sign a Form 2120 "Multiple Support Agreement" that outlines who will claim dependency for the tax year in question.
