Family caregivers contribute both their time and money to help support those they love. When tax time rolls around, it’s important to understand that you may be able to claim your care recipient as a dependent on your federal income tax return and lower your tax bill.
Fundamental IRS Rules for Claiming Dependents
To begin, there are a few rules that determine who may claim a dependent and who may be claimed as a dependent:
- You can’t claim any dependents if you (or your spouse if filing jointly) could be claimed as a dependent by another taxpayer.
- You can’t claim a married person who files a joint return as a dependent unless that joint return is filed only to claim a refund of withheld income tax or estimated tax paid.
- You can’t claim a person as a dependent unless that person is a U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico.
- You can’t claim a person as a dependent unless that person is your “qualifying relative.”
The IRS Qualifying Relative Test
There are four additional criteria that must be met for a care recipient to be considered your qualifying relative. The first is very simple: they cannot be the qualifying relative of any other taxpayer. The last three tests are explained in detail below. If all these requirements are met, then you can claim your care recipient as your dependent.
The Relationship or Member of Household Test
A qualifying relative must be related to you by blood or marriage or must live with you all year as a member of your household (and your relationship must not violate local law). However, a person cannot be your qualifying relative if they were your spouse at any point during the tax year.
Direct relatives do not have to live with you to count as a qualifying relative for tax purposes. Examples of direct relatives include your mother, father, grandmother, grandfather, stepmother, stepfather, mother-in-law, father-in-law, aunt, uncle, brother, sister, stepsibling, and half sibling.
If you wish to claim a non-relative as a dependent, such as a friend, they must have lived with you for the entire year to count as a qualifying relative in the eyes of the IRS. A non-relative is still considered to be living with you even if they spend time in the hospital or reside in a nursing home indefinitely. These scenarios are considered temporary absences, just like vacations or business trips.
The Gross Income Test
A qualifying relative’s gross income for tax year 2021 must be less than $4,300.
The IRS defines gross income as “all income in the form of money, property, and services that isn’t exempt from tax.”
If a senior’s only income consists of Social Security benefits, generally they aren’t considered taxable. However, if they have other income from sources like retirement accounts, pensions, interest and dividends, then a portion of their benefits may be taxable. According to the Social Security Administration, approximately 40 percent of Social Security beneficiaries have to pay income taxes on their benefits.
IRS Publication 915 can help you determine if a loved one’s Social Security benefits are taxable.
The Support Test
You must have provided more than half of your potential dependent’s financial support for the year, including food, housing, clothing, medical expenses, transportation, etc.
If the person lives with you, you must calculate the fair rental value of their accommodations. This is the amount you could expect to charge a stranger for the same kind of lodging, and it might include a reasonable percentage of your mortgage payment, utilities expenses, use of furniture and other household costs.
Again, direct relatives do not have to live with you to count as a qualifying relative. Whether they live in their own home, in an assisted living facility or in a nursing home, the expenses you cover for their support at those locations count toward the IRS support test for dependents.
To calculate the amount of support you provide, compare your total contributions for the calendar year to the total amount of support your loved one received from all sources for the year (including tax-exempt income). This latter figure includes personal funds, but only those actually spent on supporting themselves. Caregivers can use the IRS Worksheet for Determining Support to break down this financial comparison.
Shared Caregiving Responsibilities and Multiple Support Agreements
Often more than one person is involved in providing care and support for an elderly loved one. For example, you, your brother and your sister help support your mother. Together, you three provide more than half (60 percent) of her support. You provide 25 percent, your sister provides 25 percent and your brother provides 10 percent. The IRS rules state that an individual must provide more than half of a person’s support to claim them as a dependent, but cases like yours are treated differently.
According to the IRS, a multiple support agreement may be needed “when two or more persons, each of whom would be able to claim the person as a dependent but for the support test, together provide more than half of the person’s support. When this happens, you can agree that any one of you who individually provides more than 10 percent of the person’s support, but only one, can claim that person as a dependent. Each of the others must sign a statement agreeing not to claim the person as a dependent for that year.”
So, continuing with this example, your brother does not qualify to claim your mother as a dependent because he does not provide enough of her support. Both you and your sister qualify to claim Mom as a dependent, but you must decide between you who will do so since she can only be claimed once. If it’s decided that you will claim Mom, then your sister will need to sign a statement waiving her right to claim Mom as a dependent for that tax year (you’d save this for your own records). You will also need to file Form 2120 (Multiple Support Declaration) along with your tax return.
If you collaborate with others to support a loved one, make sure you are all on the same page so you don’t run into trouble with more than one person claiming the individual on their tax returns.
How Claiming a Dependent Can Affect Your Taxes
You may qualify for tax credits, such as the Credit for Other Dependents and/or the Child and Dependent Care Credit, if the criteria above are met and you can claim your loved one as your dependent. Additionally, if you itemize deductions instead of taking the standard deduction, you may be able to deduct your loved one’s unreimbursed medical expenses and dental expenses.
Claiming your care recipient as your dependent can lower the taxes you owe and help you recoup some of the outlays you have made on their behalf. If you are unsure about what credits and deductions you are eligible for, it is always best to consult a qualified tax professional for assistance.
For more information on claiming an elderly relative as a dependent, see IRS Publication 501: Dependents, Standard Deduction and Filing Information.