Whether you are a senior citizen or a caregiver for one, tax season means accounting for the past year’s medical expenses. Both individuals and people who care for qualifying relatives can claim tax deductions and credits for out-of-pocket medical expenses. These costs can include a range of expenditures, including dental treatments, the cost of transportation needed to get to a medical appointment, health insurance premiums, and qualified long-term care services. The IRS states, “Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of diseases, and the costs for treatments affecting any part or function of the body.” For a full list of allowable medical expenses, see Publication 502 (2007) at the IRS web site (www.irs.gov). Read on about the rules that govern deductions and for more tax tips for seniors and their caregivers.
For you to qualify for caregiver tax deductions and credits, the person you are caring for must be a spouse, dependent, or qualifying relative, as well as a U.S. citizen or resident of the United States, Canada, or Mexico. A qualifying relative includes a parent, stepparent, father-in-law or mother-in-law, or any other person who lived with you all year as a member of your household. The caregiver and medical expense tax rules have several important qualifications:
7.5% rule
The 7.5% rule says you can only deduct medical expenses—for both yourself and your loved ones—if these costs exceed 7.5% of your adjusted gross income.
Dependency deduction
To qualify for a dependency deduction, you must pay for more than 50% of your qualifying relative’s support costs. The relative only qualifies as a dependent if he or she meets the gross income and the joint return test. He or she must not have a gross income in excess of $3,400 in 2006 and cannot file a joint return for 2007. If your relative doesn’t qualify as a dependent because of these tests, you cannot claim a dependency deduction, but you can still claim his or her medical expenses.
Multiple support agreement
If a group of people are sharing costs for a qualifying relative, a multiple support declaration (IRS Form 2120) can be filed to grant one family member the exemption. “This is subject to certain conditions,” says Ron Nagle, CPA, senior tax manager of Clothier & Head in Seattle. “Anyone who is paying medical and support costs with another person should consult a professional tax advisor.”
Long-term care services
Long-term care medical expenses—including diagnostic, preventive, therapeutic, curing, treating, mitigating, rehabilitative, and maintenance and personal care services—are deductible if the services are required by a chronically ill individual and a licensed health care practitioner prescribes the care. An individual is chronically ill if unable to perform at least two of six activities of daily living, which are eating, toileting, transferring, bathing, dressing, and continence. An individual who is cognitively impaired and requires substantial supervision is also considered chronically ill.
Nursing services performed in a nursing home, an assisted-living facility, or similar care facility are also deductible expenses if the person is principally receiving care for medical reasons. However, if a person is staying at a nursing home, an assisted-living facility, or similar care facility only for custodial reasons, only medical expenses are deductible; in this instance, meals and lodging are not deductible. If your qualifying relative is staying at a nursing home, assisted-living facility, or similar care facility for custodial care, a staff member should be able to state what percentage of care received qualifies as a medical care, says Nagle. Similarly, nursing services at performed at home are deductible expenses. If the patient is chronically ill, certain maintenance and personal care services are also deductible.
Long-term care insurance
Senior citizens and caregivers should be aware that premiums paid for qualified long-term care insurance contracts are also deductible medical expenses. According to the IRS, the contract must:
- be guaranteed renewable;
- not provide a cash surrender value;
- not pay costs that are covered by Medicare;
- provide that refunds, other than refunds upon death, surrender, or cancellation of the contract, and dividends are used only to reduce future premiums or increase medical benefits.
For 2007, long-term care premiums are deductible up to the following dollar amounts: for individuals age 61 to 70 the limit is $2,950, for individuals 71 and older the limit is $3,680.
Many state governments also offer tax credits and deductions for caregivers on state income tax forms, so it pays to know your individual state’s rules.
By nature, tax rules are complex. It’s important to consult a tax attorney or accountant versed in eldercare tax issues about your specific situation before finalizing your taxes. The AARP also offers free assistance and tax tips for seniors through its Tax-Aide program; go to http://www.aarp.org/money/taxaide/.
