It is very common for families to pay for the costs associated with caring for children, family members and other dependents. However, there are plenty of tax deductions, credits, and other incentives for which caregivers may qualify to help them mitigate some of the costs.
Deductions may be available for medical expenses paid for dependents which have not been reimbursed by an insurance plan. Caregiver can deduct part of qualified medical expenses that is more than 7.5% of caregiver’s adjusted gross income (AGI). This deduction benefits the caregiver who accumulates significant medical expenses throughout the year that would exceed the standard deduction. Keeping detailed receipts, invoices and other proof of medical expenses is important in determining if you are qualified for itemized deduction with medical expenses deduction.
Another potential credit that a caregiver may utilize is the child and dependent care credit (CDCC). This credit is available for caregivers who pay for childcare for a child who is under the age of 13 in the United States and/or for those who pay for care for dependent adult.
Qualified childcares expenses may include babysitters and nannies, daycare, camps and before/after-school programs.
Expenses that can be claimed may depend on a few factors including AGI and number of children. If you have one dependent, you can claim up to $3,000. For two or more dependents, the total expenses that you may use to calculate the credit may not be more than $6,000.
Those with qualifying child under age 17 may be eligible for child tax credit (CTC). Qualifying child must be son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister, or a descendant of one of these (for example, a grandchild, niece or nephew). Caregivers is eligible for a credit of $2,000 for each qualifying child can be received if AGI is below $200,000 (for individuals) or $400,000 (for married filing jointly). When AGI exceeds these amounts, child tax credit begins to phase out.
Dependent tax credit (DTC) is a $500 tax credit allowed for each dependent (other than a qualifying child) of the caregiver. In line with the requirements for the CTC, this credit is subject to the specific phaseout rules based on AGI.
Flexible spending accounts (FSAs) and health savings accounts (HSAs) are tax-advantaged accounts that allow caregivers to contribute pre-tax dollars for future qualified medical expenses.
FSAs allow caregivers to use pre-tax contributions to pay for healthcare costs for other members of the household, not just the dependents.
HSAs allow caregivers to contribute pre-tax dollars under a high deductible health plan. The contribution can earn interest in a saving account and can be used to pay for various medical expenses and even some basic healthcare purchases (such as wheelchairs, hearing aids and other devices).
These are some of the many tax credits, deductions and other incentives that can benefit caregivers and mitigate the costs they paid for. Please consult with a financial advisor or tax professional to explore more tax incentives that might help you minimize your tax.
If you have any questions or would like additional information about anything mentioned, please comment below or email us at askus@lgt-cpa.com