With the holiday season behind us, it’s time to start thinking about taxes! We know that isn't the first thing you want to think about but you will need to pay close attention this year.
According to the IRS, the 2021 tax season will start on Friday, February 12, 2021. The February 12 start date for individual tax return filers allows the IRS plan, coordinate and implement changes due to the December 27 tax law changes that provided a second round of stimulus payments.
Although there is just under three months until the filing deadline on April 15th, now is a prime opportunity to get organized with all of your tax preparations - especially if you are a family caregiver. There is no indication that the tax filing deadline will be extended this year (unlike last year) so be prepared and don't count on it!
Here are some beginning of the year tax tips that can save family caregivers money in the long run.
How to Prepare for Tax Season
Get Organized Early
The best approach is to track all expenses throughout the year so you are organized and prepared with little effort. If you haven’t, start pulling together all of your receipts and use excel to map out all medical and non-medical expenses that you paid (out-of-pocket) for your loved one. You might be surprised to learn that you can take deductions for home modifications (such as a wheelchair ramp), long-term care insurance premiums, travel expenses to and from doctor’s appointments, etc.
Take the Minimum Required Distribution of Retirement Account for those aged 70.5+
This applies to both caregivers and care recipients. If you are aged 70.5+, than you’re required by law to make traditional IRA withdrawals annually via Required Minimum Distributions (RMDs). If you do not make this RMD, you could be forced to pay a hefty tax penalty. Now is the time to double check with your accountant to see if you have taken the required actions this year.
Claim a Dependent (if providing more than 50% of the support for family member)
According to the IRS, you may claim your aging parent as a dependent if you meet the following requirements:
- You are not a dependent of another taxpayer.
- Your parent, if married, does not file a joint return.
- Your parent is a U.S. citizen, U.S. national, U.S. resident alien, or a resident of Canada or Mexico.
- You paid more than half of your parent’s support for the calendar year.
- Your parent’s gross income for the calendar year was less than the exemption amount.
- Your parent is not a qualifying child of another taxpayer.
This can be a little complicated so don’t be shy and get tax advice. This could be a big tax saver for you and could help you manage all of those costs throughout the year.
Claim Dependent Care Credit (if you pay for adult day care or home health care)
This type of a tax credit is often referred to as the Child and Dependent Care Credit (or Aging Parent Tax Credit). This is designed to provide a tax credit for expenses made by a caregiver, in order to care for a dependent (an aging parent in this case). Examples of these expenses may include adult day care or in-home care, which allows the caregiver to work. Don't miss out on both your standard deductions and those you might not realize are available.
Claim Medical Expenses for Tax Credit
Whether you are the caregiver or care recipient, you can claim medical expenses as a tax deduction. Those expenses paid out-of-pocket for health insurance premiums, dental treatments, cost of transportation, and other long-term care services may qualify. If your medical expenses are greater than 7.5% of your adjusted gross income than you can deduct them on your taxes.
Use Your Flexible Spending Accounts
A Flexible Spending Account is a special account you put money into that you use to pay for certain out-of-pocket health care costs. You don’t pay taxes on this money and the funds in these accounts become ‘use or lose’ at the end of the calendar year. As a caregiver, you may use this account to pay for your loved one’s expenses as long as you are responsible for more than 50% of their support.
For any of the suggestions above, please be sure to check with your financial advisor before taking any action, as individual states may have additional tax benefits. Take the opportunity now and get your taxes organized.
Remember to protect yourself and aging loved one from tax scams and fraud. Find out more in our recent article here.
Make sure to use all of the free resources available for yourself and aging loved ones including the AARP Free Tax Aid.
Get started today, ask for help and pay close attention to any news and updates from the IRS and your local and state authorities.