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A Caregiver's Guide to Tax Preparation

When caring for an elderly parent or loved one, your primary focus is to provide for them the things they are unable to do any longer, and that often includes issues related to their finances. Typically, a caregiver takes over the bill paying, medical claims, insurance claims, investment savings, and tax preparation.

At this time of year, especially, caregivers should be researching last-minute tax advantages in order to be prepared for filing by April 15. Here are some areas to investigate.

Medical Expenses

"They should determine if there will be enough of a medical deduction for itemizing deductions," says Carol Katz, CPA, deputy tax director at Leonard J. Miller & Associates, Chartered, in Baltimore . "If the taxpayer -- either the caregiver or the care-receiver -- has medical expenses that exceed 7.5% of their adjusted gross income, medical expenses are deductible - if they can itemize on Schedule A. Sometimes it is better to bunch these expenses and defer paying some at the end of the year if one cannot itemize, and try to have enough to itemize the following year."

Katz explains that not all taxpayers have enough deductions to itemize, so they end up using the standard deduction. The caregiver would be wise to review the expenses as they near year-end in order to maximize deductions when filing.

So what ARE medical expenses? The Internal Revenue Service defines them this way:

Medical expenses include the cost of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs of treatments affecting any part or function of the body. The medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness. Medical expenses include dental expenses. Medical expenses do NOT include expenses that are merely beneficial to general health, such as vitamins or a vacation.

Medical expenses include the premiums you pay for insurance that covers the expenses of medical care, and the amounts you pay for transportation to get medical care. Medical expenses also include amounts paid for qualified long-term services and limited amounts paid for any qualified long-term care insurance contract.

Many items are considered under the heading of "Medical Expenses," including such things as the amount paid for transportation that is primarily for medical care and the expense of a wheelchair that is used for the relief of sickness or disability but not for transportation alone. To find out whether an item is one that can be deducted as a medical expense, review a copy of Publication 502 on the IRS web site at www.irs.gov/pub/irs-pdf/p502.pdf .

For the Caregiver

According to IRS Publication 502, caregivers are entitled to the following benefits: You can generally include medical expenses you pay for yourself as well as for someone who was your spouse or dependent either when the services were provided or when you paid for them. If you are considered to have provided more than half a person's support under a multiple support agreement, you can include medical expenses you paid for that person, even if you cannot claim an exemption for that person.

It is important for caregivers to be aware of the tax laws. They should be current on all of the deductions available to them, and to their loved one, when preparing for tax filing season. For example, nursing home expenses are deductible, and if you are paying for your parent's care in a nursing home because your parent doesn't have the resources to pay for himself, you are entitled to claim the expense. If your loved one is in a wheelchair, the cost of the chair is tax deductible as long as the use is primarily for the relief of sickness or disability and not strictly for transportation to and from work. If you, the caregiver, are footing the cost, you are entitled to an itemized deduction.

Recent changes to the tax laws include a change that reflects non-prescription medication. "A positive change has been the change by the IRS to allow certain non-prescription medicines to be allowed as reimbursable items via an employee 'cafeteria plan' (sometimes called a flexible spending plan)," says Katz. "This means certain pain-killers and other non-prescription medicines that a person needs to take can be reimbursed through a cafeteria plan, whereas before, they did not qualify."

A not-so-positive change in 2003 is a reduction in the allowance for medical mileage. In the past, caregivers were allowed to deduct 13 cents per caregiving mile in 2002; now the allowance is down to 12 cents. "However, it will go up to 14 cents in 2004, due to the cost of running an auto as calculated by the IRS," says Katz.

Understanding the Laws

According to AARP, 22 states help caregivers with their caregiving financial responsibilities by providing them with tax credits and deductions. The state tax credit programs, in addition to federal tax credits, help reduce the amount of income tax a family must pay every year. With the increased expense of caring for a loved one, it is important for caregivers to take advantage of any and all tax benefits and credits they can.

In order to be eligible, there are a few key things to note relating to your caregiver status. As stated earlier, you must have provided more than half a person's support, even if you are sharing that responsibility with other members of your family, such as siblings. The National Financial Planning Support Center lists three other key elements in determining the eligibility of tax advantages. First, the person you are supporting must be a relative, or someone who has lived with you for the year, though a non-relative living in a nursing home or assisted-living facility will still qualify.

Secondly, your loved one must be a U.S. citizen or a resident in the United States, Canada or Mexico.

Lastly, your loved one cannot have filed a joint income-tax return for the same tax year unless it was filed only to claim a refund. If this is the case, then it may be more advantageous, from a tax standpoint, to file separate tax returns. Check with your state laws on community property before going this route.

If these requirements are met, then you can claim the medical expenses as part of your overall deduction, but only to the maximum 7.5% of your adjusted gross income. In order to claim your loved one as a dependent, certain criteria must be met. The elder person's gross income cannot be higher than the personal exemption amount for the tax year in question -- $3,050 in 2003 - in order to be considered your dependent. Keep in mind that not all income is included as gross income - for example, Social Security retirement benefits and any tax-free interest on investments are exempt.

If your loved one meets this criteria, you can claim him as your dependent, just as you would a dependent spouse or child. This results in a deduction on your taxes of $3,050 for 2003.

Other tax advantages and exemptions may be available to you, depending on the state you live in and your own personal filing status. It's always a good idea to consult with an accountant or a tax professional versed in disability-related tax law before finalizing your taxes.

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Gwen Morrison lives in Lawrenceville, Georgia, and is a frequent contributor to this publication. She can be reached at gwenm4@gwenmorrison.com .

RESOURCES

For more information on this topic, check out these resources:

Internal Revenue Service (IRS) website www.irs.gov plus these specific areas:

www.irs.gov/newsroom/article/0,,id=112623,00.html

www.irs.gov/publications/p15b/ix01.html

www.irs.gov/publications/p502/ix01.html

www.irs.gov/publications/p15b/ar02.html

Family Caregiver Alliance website:

www.caregiver.org/caregiver/jsp/content_node.jsp?nodeid=924

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Bills, Bills, Bills: 8 Tips for Managing Your Loved One's Daily Finances -- 1/29/07

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A Caregivers Guide to Taxes -- 3/30/05

Family Caregivers May Qualify for Tax Breaks -- 1/22/08

Caregiver Taxes -- 3/30/05

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