A number of younger Baby Boomers and GenXers find themselves in what is often called “the sandwich generation”: caught between responsibilities to care, not only for their kids, but also for parents who have reached the age when they need assistance, both personal and financial. Further, as Baby Boomers get older, this responsibility will inevitably be passed along to younger and younger cohorts of the population. Making the challenge even tougher, rising costs for healthcare and especially long-term care are likely to raise the financial bar even higher as time goes on.
But there’s a little bit of potential good news for those who find themselves in this situation. Four provisions in the tax code may provide at least a bit of relief for those contemplating the rising cost of dependent care, especially those typically associated with taking care of elderly dependents. For mid- to later-career professionals, who often must concern themselves with the welfare of multiple generations, these tax breaks can make a big difference.
1. Child and Dependent Care Credit. In 2023, if your earned income is between $43,000 and $400,000 (married filing jointly; $200,000 for single filers), you may be eligible for a tax credit equal to a percentage of expenses you paid to someone else to provide care for an eligible dependent so you could work or look for work (if your income is less than $43,000, the percentage increases incrementally, up to 35%). Dependent parents must have been mentally or physically incapable of taking care of themselves and must have lived with you for half of the year or more. You will have to provide detailed information about the care provider, who typically must not be someone you can claim as a dependent or your spouse. To learn more about this credit, see IRS Topic 602.
2. Flexible Spending Account with Your Employer. A flexible spending account (FSA), sometimes called a “cafeteria plan,” is a benefit that may be offered by your employer. An FSA allows you to direct an amount of your salary or wages, up to $3,050 annually, to an account you can use to pay childcare, elder care, or medical expenses. You don’t pay taxes on the amount you redirect, so this can be a smart way to pay for elderly dependent care with tax-free dollars. You should check your employer’s plan documents to verify what types of expenses are eligible for payment, and again, to be “qualifying persons,” those for whom you are providing care must be claimed as dependents on your tax return.
3. Credit for Children and Other Dependents. If your modified adjusted gross income (MAGI) is under $200,000 (for singles; $400,000 for married filing jointly) and you have provided at least half or more of the person’s financial support, you may qualify for a $2,000-per-child (under 16) tax credit, and a $500 credit for a dependent parent, even if the parent doesn’t live with you. The key is that they must be claimed as your dependent, and you must provide at least half of their support, which can include food, clothing, shelter, utilities, health care, and other expenses. This is a tax credit, which means it is a dollar-for-dollar reduction in the amount of taxes you would otherwise owe. If you think you qualify for this credit, talk to your tax advisor and also review the IRS guidelines here.
4. Medical Expense Deduction. If you are paying qualified medical expenses for an elderly dependent that are in excess of 7.5% of your adjusted gross income, you may be able to claim this deduction on your return. In other words, if your adjusted gross income is $100,000, and you have paid more than $7,500 in qualified medical expenses for the dependent during the year, the amount in excess of $7,500 could be deductible. Your tax advisor can help you determine if this, along with other deductibles you may be eligible for, is greater than the standard deduction of $13,850 ($27,700 for married filing jointly) that was enacted as part of the Tax Cuts and Jobs Act of 2019.
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This information has been derived from sources believed to be accurate and is intended merely for educational purposes, not as advice.