In the U.S., most seniors will need long-term elder care services by the time they hit 75 and 85 years of age. According to one study, an estimated 14.4 million middle-income seniors will cross this threshold by 2029. A majority (60%) will have mobility issues and some (20%) will be dealing with what the study calls “high health care and functional needs,” or those with three or more chronic conditions and a limitation in one or more activities of daily living.
Because of this, spouses and adult children are getting the help of caregivers. Or, they are forced to put their lives on pause to take care of their aging loved ones – a whopping 53 million of them, according to a study by the AARP. The same research found that 63% of caregivers in the country were looking after seniors who had long-term physical conditions.
But, elder care comes with an expensive price tag. So, it’s no wonder people are looking for ways to lessen the cost of elder care that they have to shell out. One way to do this is through deducting elder care from taxes.
Medical Care Tax Deduction
The IRS allows itemized qualified medical expenses to be deducted from your adjusted gross income. Qualifying medical expenses refer to those prescribed by a licensed healthcare practitioner, including dental expenses. Such medical expenses cover costs of diagnosis, treatment, and prevention of disease as well as qualified long-term care services. You can also include payments for legal medical services and transportation to get medical care.
However, you won’t be able to deduct vitamins and housekeeping services even if this was recommended by a doctor. Check out Publication 502 at the IRS website to learn which expenses can and cannot be deducted from your taxes.
You can deduct medical expenses from your adjusted gross income if you paid for them and did not receive reimbursement from insurance or other programs. Adjusted gross income generally refers to the amount remaining after subtracting certain adjustments like retirement plan contributions from your annual gross income.
These qualifying medical expenses should be more than 7.5% of your adjusted gross income. For instance, if your adjusted gross income is $76,000 and qualifying expenses totaled $100,000, you can deduct anything beyond $5,700.
Just remember that you can only include those qualifying medical expenses paid for this year. However, this deductible generally excludes any advance payments for medical or dental services to be received in a future year.
You can generally file for this tax deduction if you paid for medical expenses for yourself or for your spouse or dependent parent. You can find instructions on how to file for tax deductions at the IRS website.
Tax Deductibles vs. Tax Credits
Note that in this post, we only talked about tax deductions and not tax credits. While both reduce the amount you pay to the IRS, they work in different ways.
Tax deductibles, or tax deductions, reduce your taxable income. In addition to medical expenses, tax deductions can include mortgage interest, certain business expenses, charitable contributions, and other qualifying expenses.
There are two tax strategies you can use to reduce your taxable income. Standard deduction is based on your filing status. For instance, if you’re single or married but filing separately, you can claim a standard deduction of $13,850 as of 2023. If you’re married and filing jointly or you’re a surviving spouse, you get a standard deduction worth $27,700. If you’re filing as head of household, it’s $20,800. Meanwhile, going through the itemized deduction route will be a good option if your qualifying expenses amount to more than your standard deduction.
Tax credits, on the other hand, reduce the amount of taxes, dollar for dollar, which you owe to the IRS. In other words, it lowers your tax bill, not your taxable income. Just note that some tax credits are refundable and some are not.
Refundable tax credits will pay out your taxes in full and any excess will be refunded to you. With non-refundable tax credits, you don’t get the excess amount as a refund nor will it be carried over to future years. So, it’s lost and can’t be used.
How Expensive is Elder Care?
Researchers peg long-term care to a half-trillion dollars per year. Fees for caregivers, home health aides and other elder care professionals are more than $20 per hour, while adult day health care costs more than $50 per day. This can easily add up to tens of thousands per year.
These costs will only balloon once aging spouses or parents are placed in a long-term care facility. A New York Times report stated that monthly rates at a nursing home can cost $10,830, which totals over $100,000 for a one-year stay. An assisted living facility, though cheaper, will still leave you $5,806 poorer per month. Expect these costs to be higher in big cities and areas nearby as well as if you put them in memory care facilities and other specialized settings.
And, the worst part is insurance premiums are too expensive or it won’t cover a good chunk of these costs. Medicare, for instance, will only cover services that are medically necessary, such as home aid during recovery or short-term rehabilitation, but not the costs of a long-term care facility. Medicaid too has strict requirements that basically makes you eligible once you have depleted your savings or sold off your assets.
“You basically want people to destitute themselves and then you take everything else that they have,” Gay Glenn, whose mother lived in a nursing home in Kansas until she died, told The New York Times about her experience with Medicaid.
Is elder care tax deductible?
In conclusion, tax is a complicated topic for most people. With all the tax rules and regulations, our tax code is filled with nuances that are best navigated with the aid of professional guidance, such as from a certified public accountant. A financial advisor or a personal income tax specialist can also help.
Reach out to them when you’re filing your tax returns to ensure you’ve left no deductions or tax credits up in the air. Especially when you’re dealing with paying for elder care, every little bit of money saved is a big deal.