This post was originally published on August 4, 2021, and extensively updated on August 10, 2023
As you get older, the likelihood increases that you will need to care for an aging parent (or possibly more than one). Depending on your circumstances and theirs, the best solution might be bringing them into your home so they can live with you. When that happens, it will affect every aspect of your life, including your finances.
At CMP, it’s our goal to help our clients prepare financially for the eventuality of caring for their parents. You may not know that more than one tax credit is available if you have an elderly parent living with you. In this post, we explain what the credits are, who can take them, and what it means for your taxes going forward.
Tax Implications of a Parent Living with You
Let’s start by discussing the general tax implications of a parent living with you. There are several to consider.
The first and most significant implication is that bringing an elderly parent to live in your home will add to your household expenses. Even if they have some income from Social Security or investments, it may not be sufficient to pay for their comfort and care. For example, while your mortgage and property taxes remain the same, your utility, grocery bills, and other expenses will likely increase.
On a related note, you may be taking in your elderly parent as a dependent. In terms of taxes, that can be a good thing. We’ll talk more about the possibility of claiming a parent as a dependent on your taxes.
If you have siblings and you’re all contributing to your parent’s care, then the tax implications may be more complex than they appear on the surface. As a result, you may need to consult with a tax professional to ensure that you handle your taxes properly.
At the other end of the spectrum, if your parents have money saved, they may decide to pay you on an ongoing basis or in a lump sum to help defray the cost of their living with you. The specifics of your situation will dictate, at least in part, how much financial impact living with one or both parents will have on you.
Tax Breaks for Taking Care of Elderly Parents
If you’re taking care of an aging parent in your home, there are tax breaks to help you recoup some of your expenses. Let’s review them here.
Credit for Other Dependents
The first potential tax break is the option of claiming your parent as a dependent on your tax return. You may do so even if your parent doesn’t live with you, but here, we focus on the requirements to claim dependency for a parent who does live with you. They include the following:
- Your parent must be a citizen or resident of the United States, Canada, or Mexico.
- Parents, grandparents, and stepparents are eligible; foster parents are not.
- They must not file a joint tax return. If married, they must file a separate return. The only exception is if they are filing only to claim a refund.
- Their gross income must be less than $4,400. Gross income does not include payments from Social Security or other tax-exempt income; however, if their gross income is over $25,000, part of their Social Security may be counted as gross income. (Note that the maximum gross income for dependents may change from year to year; the amount listed is for the 2022 tax year.)
- You pay more than half of their support during the year. You may need to work out the details with your siblings if they do contribute to your parent’s care.
If you qualify to claim your parent as a dependent, you can get a $500 dependent care credit when you file your federal income tax return. This credit phases out at an income of $200,000 if you file an individual return and $400,000 if you are married and filing jointly.
Pros and Cons of Claiming Parents as Dependents
Before you claim one or more parents as dependents on your tax return, you should know the pros and cons.
Pros of Claiming Parents as Dependents
- You can offset some of the expenses of supporting your parents with the tax credits that we’ll explain in this post.
- Your parents may be eligible for certain Social Security benefits if you predecease them.
- There may be a lower inheritance tax rate if you claim your parents as dependents.
Cons of Claiming Parents as Dependents
- Your personal tax exemptions may reduce when you claim a parent as a dependent.
- The expenses associated with supporting a parent may exceed the tax benefits.
- There will be additional paperwork to complete to prove that you support one or more parents.
- There is a higher risk of being audited when you claim a parent as a dependent, although the overall risk is still low.
- If your parents still file a separate tax return, their eligibility for certain credits may be reduced or eliminated.
Can I Claim My Parents as Dependents if They Receive Social Security?
If your parents are collecting Social Security benefits, you may still be able to claim them as dependents. The income limit of $4,400 usually does not include Social Security income, so you can claim them provided they have less than $4,400 income outside of Social Security.
If your parent receives income from dividends or interest, then a portion of their Social Security may be taxable. If you’re unsure whether you can claim a parent as a dependent, check with a tax professional.
Child and Dependent Care Credit
What happens if you have an elderly parent living with you and someone is paid by you to provide care for them while you work or look for work? The answer is that you may be eligible to take the Child and Dependent Care Credit.
The Child and Dependent Care Credit allows you to deduct up to $3,000 of care-related expenses if you hire someone to tend to a parent who lives with you. You can claim up to $6,000 if you are caring for two parents.
The only exception you should be aware of is that if you receive a dependent care benefit that is excluded or deducted from your income via your employer, you’ll need to subtract that benefit amount from the credit before you claim it.
We should note here that we are talking about the federal Child and Dependent Care Credit. Some states offer an additional credit that will reduce your taxes on the state level. As of this writing, 26 states offer a child and dependent care credit, and three additional states offer a tax deduction to offset the expenses of supporting a parent.
Dependent Care Benefits
Suppose your employer offers a Flexible Spending Account (FSA) as part of your benefits package. In that case, you can take advantage of tax-free savings to offset the expenses of caring for your elderly parent.
As of 2023, the Internal Revenue Service allows up to $3,050 to be contributed tax-free to an FSA. There is a catch, though. You must claim your parents as a dependent if you want to use FSA funds to pay for their care.
The good news is that if you can claim your parents as a dependent, you can use your FSA contributions to reduce your taxable income and save a significant amount on your taxes. Even if you haven’t used your FSA in the past, you can start contributing now to prepare for potential future expenses.
Dependent Care Flexible Spending Accounts
Some employers offer a flexible spending account (FSA) to help pay the costs of caring for dependents. While originally created to pay for childcare costs, there are some circumstances when you may use a Dependent Care FSA to pay to support your parents.
To qualify, you must be able to claim a parent as a dependent, and they must be physically or mentally incapable of taking care of themselves. You can contribute up to $5,000. Contributions are made on a pre-tax basis and money may be withdrawn if it is to be used for an eligible expense.
Medical Expenses Deduction
Medical expenses can add up quickly when you’re caring for an aging parent. By the time you have paid for prescription medications, doctor and hospital bills, and medical equipment, the cost can be extensive. The good news is that if the amount you pay exceeds the IRS threshold for medical expenses, you could claim the medical expense deduction and deduct a portion of what you paid as an itemized deduction when you file your taxes.
As of 2022, the rule is that if your medical expenses exceed 7.5% of your adjusted gross income, you may claim part of those expenses as a tax deduction. For example, if your adjusted gross income was $50,000 and you paid $10,000 in medical expenses, you could potentially claim $6,250 of those expenses as an itemized deduction.
The caveat here is the same as for the FSA contributions. You must be able to claim your parent as a dependent to deduct any part of their medical expenses when filing your taxes. Keep in mind that state requirements may be lower than those imposed by the IRS, so you could save money on your state taxes as well.
As of 2023, the standard deductions for taxes are as follows.
- $13,850 for singles and married filing separately
- $27,700 for married filing jointly
- $20,800 for a single head of household
We’ll talk more about that final item below. You could claim a larger standard deduction if you qualify to file as a head of household.
Before the passage of the Tax Cuts and Jobs Act, you could claim a personal exemption on your tax return. The last tax year you could claim a personal exemption for yourself or any dependents was 2017. The personal exemption was replaced by a higher standard deduction and other items, including the Credit for Other Dependents, as mentioned above.
We mention it here to round out your knowledge because it might be confusing if you come across outdated information online.
Head of Household
This tax break will not apply to you if you’re married, but it could save you a significant amount on your taxes if you are single and taking care of an aging parent.
The Head of Household filing status is meant to assist people who aren’t married but are responsible for the care of one or more dependents. If you qualify to claim your live-in parent as a dependent, you may also qualify to file as Head of Household.
The Head of Household filer gets to claim a larger standard deduction than single people. As noted above, the standard deduction for 2023 for heads of households is $20,800. That’s an increase of $6,950 from single status. We encourage you to explore your qualifications if you are single and caring for one or both of your parents at home.
Credit for the Elderly or the Disabled
If your parents still file a separate tax return or if you’re over 65 years old and retired, you may be eligible to claim the Credit for the Elderly or the Disabled. To qualify, you must meet one of two requirements, as follows.
- You (or your parent if they file a tax return) are over 65; or
- You (or your parent) retired on permanent and total disability.
Even if you qualify based on these requirements, you must still have income below the threshold to claim the credit. The limit for Adjusted Gross Income is $17,500 ($20,000 if married and filing jointly; $25,000 if both spouses qualify.) You must also have less than $5,000 of non-taxable income from other sources to qualify. The credit may range from $3,750 to $7,500 depending on your eligibility, marital status, and other conditions.
What if Multiple Siblings Support an Elderly Parent?
One of the most complicated things about caring for an aging parent is how to cope when multiple siblings are involved. If you take a parent into your home, the emotional and financial burdens will impact you more than your siblings.
The first consideration to keep in mind is claiming dependency. As stated above, you must be paying at least 50% of your parent’s expenses to claim them as a dependent. If you share expenses among siblings, you should keep that percentage in mind and have a frank discussion about how they will contribute.
The second consideration to remember is that only one sibling may claim the parent as a dependent. You’ll run into problems with the IRS if more than one of you attempts to do so.
We should note here that in the past, you could have claimed a personal exemption if you paid at least 10% of your parent’s expenses, but with the elimination of the personal exemption, that is no longer the case.
Also, note that in most situations, the tax credits and tax deductions mentioned here apply only to the sibling claiming the parent as a dependent. You may want to consult a financial professional to help you navigate the finer points of sharing responsibility and managing the financial aspects of eldercare if more than one sibling contributes to the parent’s care.
Filing Taxes for Elderly Parents
In some cases, you may need to file taxes for your parents. Here are some tips to help you do that.
The first step is to determine whether your dependent parent is required to file a tax return. For 2022, the income requirements are $14,700 for parents over 65 filing a single tax return, $27,300 for joint filings if one spouse is over 65, and $28,700 if both spouses are over 65.
You’ll need the following information if you need to file a tax return on behalf of a parent.
- Their Social Security Number
- A copy of their most recent tax return (if you don’t have a copy, you can get a tax return transcript at IRS.gov/Transcripts
- Their income and earnings statements, which may include SSA-1099 for Social Security benefits or a 1099-R for pension income
- Interest and dividend statements from banks or investment accounts
- Their bank routing and account number for direct deposit if they qualify for a tax refund
If you must sign a tax return on behalf of a parent unable to do so, you must have their power of attorney.
You may be able to offset a parent’s tax liability by deducting medical expenses if they paid them out of their income. The most important thing to do is to check whether your parent needs to file a tax return, since in many cases they may not be needed.
CMP Tax Professionals Are Here to Help You Care for Your Aging Parents
The financial and tax implications of taking an aging parent into your home are significant, as are the emotional and personal ramifications. The tax breaks we’ve outlined here have been put in place to help families provide necessary care as their parents get older. The most important thing to remember is that caring for your parents doesn’t need to mean financial stress and hardship for you.
Determining your eligibility for elder care-related tax breaks can be complicated, but our tax professionals are here to help you minimize your tax liability by taking all available deductions and credits. Contact us to schedule a free consultation and learn more about our income tax services.