Hiring an in-home senior caregiver can be costly. The good news: There are tax breaks that can help offset your care costs.
To determine which tax breaks you may qualify for, you first need to determine who the employer is. (Note that this different from child care tax breaks, where there is no question that the family is the employer). In most cases, the employer of asenior caregiveris the person receiving care or their spouse. However, it’s also possible for a relative (often an adult child) to be considered the employer, especially if the elder person is living in their home.
Let’s take a look at the tax breaks associated with each employment scenario.
Tax breaks when the senior is the employer
This commonly occurs when a senior is still living in their own home and needs in-home care. The care may be for themselves or their spouse. Depending on individual factors, these four following tax breaks may be available:
1. Medical care tax deduction (IRS Publication 502)
Employers may take an itemized deduction for qualifying medical expenses that are more than 7.5% of their Adjusted Gross Income (AGI), or 10% if they are under 65 years old. Qualifying medical expenses are generally those prescribed by a licensed healthcare practitioner. Expenses for long-term care and nursing services may also be included, even if they are not performed by a registered nurse.
The cost of general household services, such as housekeeping, cannot be itemized, even if the help is recommended by a doctor.
2. Medical Flexible Spending Account (FSA)
If the employer or their spouse has access to a Flexible Spending Account through their job, they may be able to pay for up to $3,050 of medical care using pre-tax dollars. Depending on the employer’s marginal tax rate, using this FSA will save approximately $1,200 per year.
3. Dependent Care Account (FSA)
The employer can also enroll in a Dependent Care Flexible Spending Account through work to pay for up to $5,000 of care-related expenses (usually the caregivers wages) using pre-tax dollars. This will save approximately $2,000 in 2024. Eligibility for this FSA is less common as most people taking care of a spouse will either not be able to claim them as a dependent or are not working.
4. Dependent care tax credit (IRS Form 2441)
IRS Form 2441. This tax break allows the employer to itemize up to $3,000 of dependent care expensesper dependent this year ($6,000 maximum per year). The tax credit percentage is based on income, but many employers will receive a tax credit of 20% on those itemized expenses, yielding up to $600 per year for one dependent or $1,200 per year for two or more dependents. But like the Dependent Care Account, eligibility for using this tax credit is uncommon due to either the employer being retired or unable to claim their spouse as a dependent.
It’s important to note that the IRS says the same expenses cannot be applied to multiple tax breaks. “Families need to understand what tax breaks they are eligible for first and then speak to a personal income tax professional about how to maximize their tax savings,” says Desiree Leung, Head of Operations of Care HomePay.
Tax breaks for adult children that are considered employers
In some circ*mstances, an adult child may be deemed the employer if their parent receiving care passes the Qualifying Persons test (see IRS Publication 503). Generally, in order to pass the Qualifying Persons test, the elder parent must be physically or mentally unable to take care of himself and live with the adult child for more than half the calendar year. If this is true, the following tax breaks may come into play:
Medical Care Tax Deduction
The qualifications and benefits are the same as described above.
Medical flexible spending account
Savings and qualifications are the same as above, but the savings will be tied to the adult child’s marginal tax rate.
Dependent Care Account
Also the same stipulations as described above, but it’s more common for a parent living with a child to qualify as a dependent.
Dependent care tax credit
Eligibility is the same as previously mentioned, but again, adult children whose parent lives with them are more likely to meet the qualifications for claiming the parent as a dependent.
Important disclaimer:
As with all tax rules and regulations, there are numerous exceptions, exemptions and nuances. When calculating tax breaks for senior care, it’s strongly recommended that families seek professional guidance from a CPA, financial advisor or personal income tax specialist.
For all other household employment topics, give us a call at (888) 273-3356 and we’ll be happy to provide a free consultation to address your needs.
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If you hire professional home care services for a child or aging parent who needs home care so you can work, the child and dependent care credit allows you to claim 20% of expenses up to $3,000. The specifics can vary by tax year, but in this example, 20% of $3,000 is $600.
If you hire professional home care services for a child or aging parent who needs home care so you can work, the child and dependent care credit allows you to claim 20% of expenses up to $3,000. The specifics can vary by tax year, but in this example, 20% of $3,000 is $600.
Your In-Home Supportive Services (IHSS) income may be exempt if you received income from a Medicaid waiver or IHSS program for providing care to an individual you lived with. Visit IRS' Certain Medicaid Waiver Payments May Be Excludable from Income for more information.
For the 2022 tax year, seniors filing single or married filing separately get a standard deduction of $14,700. For those who are married and filing jointly, the standard deduction for 65 and older is $25,900.
(If you're married filing jointly, this could also refer to your spouse's work or job search.) For the 2023 tax year, you can claim up to $3,000 in caregiving costs for one person, or up to $6,000 for two or more people.
The child and dependent care credit is a refundable tax credit based on caregiving costs. These costs may include home care, adult day care programs, and other expenses allowing the taxpayer to work or actively seek work. Family caregivers can claim up to $3,000 in caregiving costs for a qualifying dependent.
Is this expense deductible? You can take a medical expense deduction for out-of-pocket medical expenses not covered by insurance if you itemize deductions on Schedule A. This would include qualified in-home health care services.
Medical expenses that are more than 7.5% of someone's adjusted gross income (AGI) are eligible for the medical deduction, according to the IRS. So while there isn't one specific assisted living tax deduction, you can deduct the medical portion of assisted living expenses, such as caregiver assistance.
The person must have less than $4,700 in taxable income (for 2023). Social Security benefits and other tax-free income don't count for this purpose, but interest, dividends, and taxable pensions do. You must provide over half of their support.
You must have provided more than half of your parent's support during the tax year in order to claim them as a dependent. The amount of support you provided must also exceed your parent's income by at least one dollar.
Taxes aren't determined by age, so you will never age out of paying taxes. Basically, if you're 65 or older, you have to file a return for tax year 2023 (which is due in 2024) if your gross income is $15,700 or higher. If you're married filing jointly and both 65 or older, that amount is $30,700.
Social Security income can be taxable no matter how old you are. It all depends on whether your total combined income exceeds a certain level set for your filing status. You may have heard that Social Security income is not taxed after age 70; this is false.
Generally, the elderly or disabled tax credit ranges between $3,750 and $7,500; it is 15% of the initial amount, less the total of nontaxable social security benefits and certain other nontaxable pensions, annuities, or disability benefits you've received.
You report the taxable portion of your social security benefits on line 6b of Form 1040 or Form 1040-SR. Your benefits may be taxable if the total of (1) one-half of your benefits, plus (2) all of your other income, including tax-exempt interest, is greater than the base amount for your filing status.
You must pay taxes on up to 85% of your Social Security benefits if you file a: Federal tax return as an “individual” and your “combined income” exceeds $25,000. Joint return, and you and your spouse have “combined income” of more than $32,000.
The short answer is yes, as long as all parties agree. (To learn how to set up a formal arrangement for payment, see the FCA fact sheet Personal Care Agreements.) If the care receiver is eligible for Medicaid (MediCal in California), it might be possible for you to be paid through In-Home Supportive Services (IHSS).
You can even deduct your parent's medical expenses if they do not meet the income requirement to be claimed as your dependent as long as you provide more than half of their support. Keep in mind that your total medical expenses will have to exceed 7.5% of your adjusted gross income to claim these expenses.
A qualifying person must live with you for at least half the year. Parents don't have to live with you for half the year, but you must be able to claim them as dependents.
Medicaid HCBS (Home and Community Based Services) or 1915(c) are the most common option, allowing states to pay for in-home personal caregiving and assistance with activities of daily living (ADLs). For these waivers, in-home can mean individuals “aging in place” in their own homes, or in the homes of loved ones.
The person must have less than $4,700 in taxable income (for 2023). Social Security benefits and other tax-free income don't count for this purpose, but interest, dividends, and taxable pensions do. You must provide over half of their support.
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