Tax season can be a headache no matter who you are, what you do, or whether you get a refund. Gathering all the required documentation can be a pain—was that pharmacy receipt for deductible medication or for another stack of holiday candy?
One thing that doesn’t contribute to the hassle, however, is paying for a loved one’s senior living expenses. Aging and health can get complicated, but a larger tax refund (or a reduction in your total bill) may make the load feel lighter.
What do you need to know about senior living and taxes? As it turns out, the answer is “a lot.” Factors such as freelancing income, Social Security checks, and gifted money can all affect how much you pay in taxes, as well as what you can deduct.
We’re not tax advisors, and everyone’s tax situation is different. It’s important to consult a professional tax advisor, especially if you or your loved one’s situation is complicated or unusual. Good news, though: Your parent may be able to get tax help for free via the IRS Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs.
The following frequently asked questions about senior living, taxes, aging, and health can help point you in the right direction when you’re dealing with the upcoming tax season.
1. Does my loved one still have to pay taxes if they’re not working?
You might think your loved one no longer has to pay taxes if they’re out of the workforce, especially if they are in poor health or don’t have a lot of money. However, if your loved one has any form of income, such as from freelancing, a hobby, an inheritance, or a large financial windfall, they may still have to file taxes.
The IRS establishes a threshold of income each year that determines whether a person has to claim their income and file a tax return. The figure for 2022 for single filers over the age of 65 is $14,250.
2. Can my loved one deduct senior living expenses on their taxes? What if I’m paying my loved one’s expenses?
There are two general scenarios in which you or your loved one might be able to deduct senior living expenses.
The most common scenario is when senior living counts as a medical expense. Assisted living and memory care may be deductible. This could mean deducting the cost of senior living itself, as well as the costs of services included in senior living, such as speech therapy. The person who pays for the services is the only one who can deduct the expense, though, so you cannot deduct something your parent pays for on your taxes. But if your loved one is your dependent and you pay for senior living, you can deduct the expense if it otherwise qualifies.
If your loved one lives in an independent living community, they can’t usually deduct senior living expenses. If, however, they run a business and claim the income on their tax return, they can deduct the portion of their home that they use as a dedicated office space. They can also deduct the cost of furniture, but only when they exclusively use the space for business. They can’t, for example, deduct the entire apartment solely because they do some freelance business out of it.
3. Can my loved one deduct other healthcare expenses?
Almost all other healthcare expenses are deductible, with one big caveat: You’ll need to document them in case you are ever audited. Save receipts, invoices, and other paperwork in an accessible location.
Some examples of healthcare expenses you or your parent can deduct include:
- Doctor’s fees
- Medical supplies such as an insulin pump
- Insurance copays
- Insurance premiums
- Prescription drugs
- Medical services received in a senior living community
The IRS only allows deductions for items exceeding 7.5 percent of your loved one’s gross income. So if your loved one’s income was $20,000 last year, they can only deduct expenses that exceed $1,500 in total. Each individual expense does not have to exceed $1,500.
4. Are there ways to minimize my loved one’s tax burden?
If your loved one has little income, their tax burden will likely be very low or even nonexistent. Before you invest a lot of time in itemizing deductions, check your loved one’s income against IRS tax deduction rules.
Some strategies that may help reduce your loved one’s tax burden include:
- Keep track of their deductions: Medical expenses, mortgage interest, charitable donations, and work expenses are among the most common eligible deductions.
- Consult a tax professional: They may be able to advise about strategies to reduce tax liability or even get a refund. A tax professional can also help you identify tax credits, which reduce your total tax bill, not just your taxable income.
- Consider whether your loved one should file jointly with a spouse or not: Sometimes filing jointly increases income enough to increase a person’s tax bracket, and with it, their tax liability. This is especially true if their spouse works and they do not.
5. How can my loved one reduce estate taxes?
Estate taxes only need to be paid on a relatively large estate. Even so, parts of your loved one’s estate could be taxable even if they don’t leave behind significant wealth. For example, money in a savings or brokerage account that earns interest could be taxable depending on how your loved one bequeaths it to their heirs.
Tax planning can get really complicated, even for people who do not have significant wealth. The way your loved one structures their assets could affect their tax liability now—and your liability down the line, if you inherit property or money. In many cases, creating a trust may reduce the tax burden and make it easier for loved ones to inherit assets without going through the long probate process. Consider consulting with an estate planning attorney and a tax professional who can offer guidance for your specific situation.
If you find the task of helping your aging loved one overwhelming, know that you are not alone. Supporting an aging loved one can be difficult, but there is help. For additional guidance, check out our quick assessment, “Is it Time to Get Help?”
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