Caregiver and Senior Tax Tips: 18 Top Questions Answered

Before filing this year, it’s important to know the possible tax implications of caregiving for you and your elderly loved one. Understanding IRS guidelines for caregiver and senior filing can help you save money and avoid costly mistakes.

Learn more about claiming your aging parent as a dependent or filing on their behalf, potential caregiver tax credits, and common deductions. Below are common questions and answers for tax rules affecting caregivers.

A family caregiver spends, on average, about $7,000 out of pocket on medical, housing, and care costs for their aging loved one each year. Learn how filing taxes can help recoup your costs.

Can I claim my aging parent as a dependent?

If you’re caring for an elderly loved one, you may be able to claim them as a dependent on your income taxes. To qualify, you must meet the following five requirements:

• To claim someone as a dependent, they must be related to you. Elderly parents, as well as stepparents and in-laws, can all be claimed. The IRS doesn’t count foster parents as relatives; to claim a foster parent, they must live with you for a year or more as a member of your household.
• Your relative must be a U.S. citizen, U.S. national with a social security number, or resident alien in order to qualify as your dependent. There are exceptions for part-time residents of Mexico or Canada, but you can’t claim relatives living in other countries, even if you provide financial support.
• They can’t file a joint return. Even if they’re married, seniors must file separately to qualify. However, if your relative files a joint return exclusively for a refund, you can claim them as a dependent.
• Your relative’s gross income for 2020 must be less than $4,300. This doesn’t include Social Security payments or other tax-exempt income.
• You must provide more than half of your elderly loved one’s support. This includes clothing, lodging, food, transportation, and recreation. Senior living expenses, medical, and dental care all factor into support.

Can I share the family caregiver tax exemption with my siblings?

If you and your siblings collectively provided more than 50% of your parent’s support in 2020, any sibling who paid 10% or more can qualify for a joint exemption. All those supporting must sign and file the Multiple Support Declaration.

If I can’t claim my parent as a dependent, is there any way to deduct care expenses?

If you can’t claim your parent because their income exceeds $4,300, or because they filed a joint tax return, you still may be able to deduct care expenses — if they make up over 7.5% of your annual taxable income. To deduct medical expenses, you still need to provide 50% of your elderly loved one’s care throughout the year (or 10% if sharing the cost with siblings). They must be a direct relation, and must meet U.S. residency requirements. Check IRS Publication 502 for more details and a full list.

Qualified medical expenses are generally medical and dental expenses paid to a care provider. Medical expenses that can be deducted include:

• Premiums for Medicare Part B and Part D, as well as supplemental insurance.
• The cost of prescription drugs or insulin.
• Dental treatment, including X-rays, oral surgery, and fillings.
• Payments made for nursing services.
• The cost of long-term care, including housing, food, and personal costs. To qualify, your loved one must be unable to perform at least two activities of daily living (ADLs), such as dressing, bathing, or using the toilet.
• In-home medical equipment or mobility improvements required for medical care.
• The portion of a nursing home or long-term care facility’s entry fee designated for medical care.
• Transportation to medical appointments.
• Surgeries or other in-patient procedures.

Can I file as head of household if I care for an elderly relative?

If you meet the following requirements, you may benefit from filing as head of household:

• You’re unmarried or “considered unmarried” on the last day of the year.
• You’re eligible to claim your parent as a dependent based on the above criteria, even if they don’t live with you full-time.
• You paid more than half the cost of mortgage, rent, or managing your parent’s home.

What is the child and dependent care credit?

Surprisingly, this family caregiver tax credit doesn’t require your elderly loved one to qualify as a dependent. It’s based on the money you spend to care for them. You can claim up to $3,000 in caregiving costs for one person, or up to $6,000 for two or more. To receive the child and dependent care credit, you must meet the following qualifications:

Cohabitation. Your elderly relative must have lived with you for at least six months during the tax year.

Partial Dependency. They must either qualify as a dependent or meet all above qualifications, except maximum income or joint filing with a spouse.

Incapacity. Your relative must be physically or mentally incapable of caring for themselves.

Employment. You pay for a home care worker, adult day care, or other assistance to care for your loved one while you work or look for work.

Spousal employment. If you’re married, your spouse must also work, be a full-time student, or be disabled.

If my parent gives me money to offset care costs, or I cash their Social Security checks, do those count as taxable income?

Money your elderly relative supplies to offset their care costs doesn’t count as taxable income. Similarly, if you cash their Social Security benefits and use the proceeds to pay for care, those benefits aren’t taxable to you.

However, that money can affect claiming your relative as a dependent. You still must cover 50% of their care costs independently — not including their Social Security or personal contributions.

Even if your relative doesn’t qualify as a dependent, they may need your help filing taxes. Tax preparation for the elderly is often more involved, due to contributing factors like retirement benefits, assets, and unique tax credits. The IRS Tax Guide for Seniors, Publication 544, offers information on credits and deductions.

Do seniors have to file taxes?

It’s true some seniors aren’t required to file taxes. But not filing can lead to an audit if your elderly relative doesn’t meet qualifications. Review your loved one’s income, assets, and benefits to be sure.

A tax return is required when gross income exceeds the sum of the standard deduction for your filing status plus one exemption amount, according to the IRS. This applies to earned income, not social security, pensions, or annuities.

For the 2020 tax year, seniors need to file a return if:

• They’re unmarried, with a gross income of $14,050 or more.
• They’re married, filing jointly with a spouse who is also over 65, with a combined gross income of $27,400 or more.
• They’re married, filing jointly with a spouse who is under 65, with a combined gross income of $26,100 or more.

How does power of attorney affect tax filing?

If your loved one is unable to file their taxes due to mental or physical disability, and you’ll be filing in their stead, you can use Form 2848 to become a qualifying representative. This means you can directly receive and inspect confidential tax information. Often, lawyers will present this form when you first accept power of attorney for an aging relative.

Aging adults often have multiple sources of income, from part-time jobs to Social Security and retirement benefits. Your loved one’s filing status depends largely on the payments they receive.

Let our care assessment guide you

Does Social Security count as taxable income for seniors?

Generally, Social Security benefits don’t count as gross income. If Social Security is a senior’s only source of income, they don’t need to file taxes. If your loved one receives money from both Social Security and other sources, like employment, they shouldn’t count benefits toward their gross income.

For example: If a senior received $18,170 in Social Security benefits, $12,000 in retired railroad benefits (half which are taxable), and earned $6,000 from a part-time job, their annual gross income would be $12,000 — under the $14,050 filing threshold. They wouldn’t need to file taxes.

There are a few circumstances when seniors must include a percentage of their Social Security benefits in gross income:

• If your aging relative is married, living with a spouse, but filing separately, 85% of their social security benefits are considered gross income.
• A portion of Social Security benefits are included, regardless of filing status, if the sum of half a senior’s Social Security benefits, plus all other income, exceeds $25,000.

For example: The average Social Security beneficiary received $18,170 in 2020. If they lived with a spouse, but filed separately, 85% of those benefits — or $15,445 — would count as gross income. They would have to file taxes.

If your elderly loved one retired early on disability, taxable benefits from their employer’s disability retirement plan are considered earned income until they reach minimum retirement age. That’s the age when they would have received a pension or annuity if they hadn’t been disabled.

Thoroughly review the details of your relative’s disability retirement plan — for some companies, payments count as gross income through age 72.

Is military retirement pay taxable income for seniors?

Military retirement pay based on age or length of service is taxable, and it must be included as income for federal income taxes, according to the U.S. Army. That amount should be reported as pension income for the year. However, the amount a senior pays to participate in the Survivors Benefit Plan — also called annuities to support a spouse or other survivor — is excluded from taxable income.

For Social Security tax purposes, military retirement pay is not considered earned income, and the Federal Insurance Contributions Act (FICA) taxes aren’t withheld from military retirement pay.

How are taxes calculated for pensions and annuities?

Do seniors have to file taxes for retirement benefits? If your aging loved one receives payments in the form of pension or annuity from a qualified employer retirement plan, all or some portion of the payments may be taxable.

Payments are fully taxable if your relative didn’t contribute to the plan, according to the IRS. This means:

• They didn’t contribute anything for their pension or annuity.
• Their former employer didn’t withhold contributions from their salary.
• All contributions were received tax-free.

Payments are partially taxable if your loved one contributed after-tax dollars to their pension, annuity, or retirement plan.

If your loved one receives railroad retirement benefits, taxation rules are different. See Publication 54 for more information.

Tax considerations for life insurance, long-term care, and accelerated death benefits

If a senior is chronically or terminally ill, they may receive accelerated death benefits or life insurance payments. These aren’t included as taxable income. These benefits can be used to pay for costs covering long-term care facilities, hospice services, or medically necessary in-home care.

Long-term care insurance contracts are often treated like accident or health insurance contracts. Payouts from them are generally not counted as gross income and aren’t taxable.

Your elderly relative may receive age or income-based tax credits, or have deductible annual expenses.

Who qualifies for the tax Credit for the Elderly or Disabled?

The Credit for the Elderly or Disabled is a unique tax credit that ranges between $3,750 and $7,500. Qualifying seniors must be:

• 65 and older.
• Have an adjusted gross income or total of nontaxable Social Security, pensions, and annuities less than established income limits.

The credit varies greatly by circumstance, marital status, and benefits. Review Publication 524 to see if your loved one qualifies and  for more information.

Deducting medical and dental expenses

Seniors can deduct most medical and dental expenses prescribed by a doctor. Generally, only expenses paid for in the tax year can be deducted, regardless of when a procedure took place. Keep receipts and documentation for all services. In addition to surgeries, appointments, and prescription drugs, many often-overlooked expenses can be deducted, including:

• Bandages
• Renovations for senior home safety and accessibility.
• Oxygen
• Guide dogs or other service animals.
• Prescription vision or hearing aids.
• Lead-based paint removal.
• Meals and lodging provided by a hospital during a medical stay.
• Treatment in a drug or alcohol rehabilitation center.
• Smoking cessation aids.
• Psychiatric treatment.
• Physical or occupational therapy.

Some expenses that can’t be deducted include:

• Diapers or incontinence aids.
• Bottled water.
• Health club or exercise memberships, even if recommended by a doctor.
• HSA payments.
• Flexible spending account contributions.
• Cosmetic surgeries.
• Non-prescription or OTC medications.

Senior living tax deductions

For senior living expenses to be tax deductible, the resident must be considered “chronically ill.” This means a doctor has certified that the resident either:

• Cannot perform at least two activities of daily living, or
• Requires supervision due to cognitive impairment (such as Alzheimer’s disease or another form of dementia).

In addition, personal care services must be provided according to a plan prescribed by a licensed health care professional. A doctor, nurse, or social worker must prepare a plan that outlines the daily services and care a resident will receive. Most assisted living communities create care plans for residents, which can be used to determine tax-deductible services. This means rent and meals at independent senior retirement communities generally don’t qualify as deductions, but medical care services offered on-site may qualify.

Expenses must also exceed 7.5% of a senior’s annual income to be tax-deductible.

Home ownership benefits

Seniors who still own a home and pay a mortgage can deduct all interest on mortgages that don’t exceed $750,000.

Talk with a Senior Living Advisor

Even if an elderly loved one sells their home, if they’ve lived in it for two or more of the past five years, they don’t have to pay taxes on profits less than $250,000 — or $500,000 for married seniors filing jointly. Profits from the sale of a home can be used to pay for senior living communities that offer health care. This includes memory care, nursing homes, and some assisted living communities that provide medical assistance.

Nursing and personal care service deductions

Medical expenses and wages paid for nursing services can be included as deductions. The services don’t have to be performed by a registered nurse, as long as they’re considered medically necessary or are not possible for a senior to perform independently. This includes medication management, changing bandages or dressings, and help performing ADLs, either in home or in a senior care community.

If a caregiver also provides personal services, like housekeeping, meal preparation, or transportation, only nursing services can be deducted as a medical expense.

Filing taxes on behalf of a senior, or as a caregiver, can be complicated. Start by organizing documents, gathering past tax records, and determining your loved one’s filing status.

Determine if you’re claiming an elderly loved one as a dependent or filing separately. Use the above information to decide if your aging relative qualifies as a dependent, and if you’ll be receiving a caregiver tax credit, or they’ll be filing for an elderly tax credit.

Gather records. If this is your first year helping an elderly relative file taxes, be sure you have previous years’ returns available. Reviewing documents from the past three years can often help prepare you for filing.

Organize documents. Use a file folder or online program to keep track of important documents throughout the year. Some things to keep track of include:

• Bank statements.
• W-2 forms.
• 1099 forms.
• Payroll stubs.
• Pension, annuity, and benefit statements.
• Receipts from tax-deductible medical expenses.
• Caregiving expense receipts.
• Documentation from senior living communities.
• Dividend distribution and gain and loss statements.
• Donation receipts.
• Real estate transactions.
• Receipts from estimated or quarterly taxes paid throughout the year.

File electronically. The IRS calls E-file the “safest, fastest and easiest way to submit individual tax returns.” Filing electronically is often more efficient than filing by mail. Plus, most tax prep software offers reviews before submission. Most electronic refunds are sent by direct deposit within 20 days.

Double-check. Sometimes, small errors can lead to serious consequences. Review everything from social security numbers to income amounts before filing, or consider having a tax professional look over your work.

Consider asking for help. We suggest consulting a tax professional with any questions or concerns. Filing taxes is complicated, and errors can lead to audits or other future consequences. If your family works with a tax professional, see if they offer any discounts for senior tax preparation. The IRS website also recommends seeking local resources or free help from the following organizations:

• Free File. This program lets you prepare and file your federal individual income tax return for free using brand-name tax-preparation-and-filing software or Free File fillable forms. However, state tax preparation may not be available through Free File. Go to gov/FreeFile to see if you qualify for free online federal tax preparation, e-filing, and direct deposit or payment options.
• VITA. The Volunteer Income Tax Assistance (VITA) program offers free tax help to people with low-to-moderate incomes, persons with disabilities, and limited-English-speaking taxpayers who need help preparing their tax returns. Go to IRS.gov/VITA, download the free IRS2Go app, or call 800-906-9887 for information on free tax return preparation.
• TCE. The Tax Counseling for the Elderly (TCE) program offers free tax help for all taxpayers, particularly those who are 60 years of age and older. TCE volunteers specialize in answering questions about pensions and retirement-related issues unique to seniors. Go to IRS.gov/TCE, download the free IRS2Go app, or call 888-227-7669 for information on free tax return preparation.
• MilTax. Members of the U.S. Armed Forces and qualified veterans may use MilTax, a free tax service offered by the Department of Defense through Military OneSource.
• IRS. IRS Free Fillable Forms, which can be completed online and then filed electronically regardless of income.

Sources:

AARP. “Tax Tips for Family Caregivers.” 
https://www.aarp.org/caregiving/financial-legal/info-2017/tax-tips-family-caregivers.html

AgingCare. “Tax Questions and Answers for Caregivers.” 
https://www.agingcare.com/articles/caregiver-tax-questions-and-irs-forms-148709.htm

Elder Law Answers. “Claiming a Parent as a Dependent.” 
https://www.elderlawanswers.com/claiming-a-parent-as-a-dependent-3657

Elder Law Answers. Tax Deductions for Assisted Living Costs. 
https://www.elderlawanswers.com/tax-deductions-for-assisted-living-costs-7184

Forbes. “Medical Deduction Tax Relief.” 
https://www.forbes.com/sites/ashleaebeling/22/medical-expense-deduction-tax-relief-is-big-win-for-seniors-in-year-end-spending-bill/?sh=3e8f042a1b4d

Intuit. “When Does a Senior on Social Security Stop Filing Taxes?” 
https://turbotax.intuit.com/tax-tips/retirement/when-does-a-senior-citizen-on-social-security-stop-filing-taxes/L53Hx1v9W

IRS. “For Caregivers.” https://www.irs.gov/faqs/irs-procedures/for-caregivers

IRS. “Publication 554 (2020), Tax Guide for Seniors.” 
https://www.irs.gov/publications/p554#en_US_2020_publink100043692

Navy Federal. “Are VA Benefits Taxable?” 
https://www.navyfederal.org/resources/articles/life/are-veterans-benefits-taxable.html

U.S. Army. “Federal Taxes on Veterans’ Disability or Military Retirement Pensions.” 
https://myarmybenefits.us.army.mil/Benefit-Library/Federal-Benefits/Federal-Taxes-on-Veterans-Disability-or-Military-Retirement-Pensions?serv=122