Deducting Medical & Dental Expenses for Elderly Dependents or Primary Filers
This information has been reviewed and is accurate for the tax year 2014, which is filed in the calendar year 2015.
Medical and dental expenses can be deducted if their total sum exceeds 7.5% of the tax filer’s adjusted gross income. By deducting these expenses, one's income is lowered and therefore the amount of tax they owe is also reduced.
While tax deductions are not a source of funds for eldercare, a reduced tax burden can enable a family to re-allocate resources to help cover the cost of care. When combined with other options, this might make the difference between being able to afford home care or assisted living. Furthermore, lowering one's adjusted gross income may help make one eligible for other forms of federal and state assistance.
Medical and dental expense deductions should not be confused with the Dependent Care Tax Credit, which is meant for dependent care expenses the primary taxpayer incurs to enable them to work instead of caring for their dependent.
Tax Deductions vs. Tax Credits
Tax deductions lower your taxable income, so if your income is $50,000 and you have a $2,000 deduction, then you will pay taxes on $48,000. Tax credits are applied to the taxes you owe. If you owe $3,000 in taxes and you have a credit for $500, then you only have to pay $2,500.
Scenarios for Using this Credit
Medical and dental expenses are deductible in each of the following four tax filing scenarios.
1) When the care recipient is filing his/her own taxes and their personal annual medical and dental expenses exceed 7.5% of their adjusted gross income.
2) When a married couple is filing jointly and their combined medical and dental expenses exceed 7.5% of their combined adjusted gross income.
3) When a married couple is filing separately. Since the deduction is based on expenses as a percentage of income, splitting income between two individuals and filing separately may yield a greater overall tax reduction.
4) When a family member or caregiver is claiming the care recipient as a dependent, they can combine that individual’s medical and dental expenses with his or her own expenses. If the combined expenses exceed 7.5% of their combined adjusted gross income, they can claim the expenses as a deduction.
Any of these scenarios may result in invalidating other deductions. It is recommended to prepare taxes considering all alternatives (or have a tax professional do so) to determine which approach is most beneficial to the taxpayer and family unit on the whole.
Claiming an Elderly Person as a Dependent
In order to claim an individual who requires care as a dependent, there are two essential qualifications. The tax filer must provide over half of the dependent’s financial support, and the dependent must be related or have lived with the tax filer for a full calendar year.
There is an exception to the 50% financial support rule made when several individuals, typically family members, together contribute at least 50% of the support for the elderly dependent. In this case, the contributors can prepare a mutually agreed-upon "Multiple Support Declaration", which allows one of the contributing individuals to claim the elderly as a dependent and deduct that elderly person’s medical expenses. When using a "Multiple Support Declaration", the tax filer needs only to have contributed 10% of the total.
When a dependent aging parent is certified chronically ill and following a prescribed plan of care, then the total cost of skilled nursing or assisted living can be included as a Medical Expense.
"Medical and Dental Expenses" include a wide range of expenditures, some of which are not immediately obvious. See IRS Publication 502 for a complete list of qualifying medical and dental expenses. A partial list follows. Worth noting, if a senior is certified as chronically ill, the list of eligible expenses is expanded.
- Medical fees from doctors, laboratories, assisted living residences, home health care and hospitals
- Cost of transportation to receive medical care
- Premiums for health insurance and qualified long term care insurance
- Home modifications costs such as wheelchair ramps, grab bars and handrails
- Personal care items, such as disposable briefs and foods for a special diet
- Cost of prescription drugs
- Entrance fees for assisted living
- Room and board for assisted living if the resident is certified chronically ill by a healthcare professional and following a prescribed plan of care. Typically this means that they are unable to perform 2 ADLs or require supervision due to Alzheimer's disease or other conditions.
- Medical expenses that are reimbursed by health insurance, Medicare or any other program.
- Payments or distributions out of health savings accounts
- Non-medical care to enable the tax filer to be gainfully employed. However, the taxpayer can receive a tax credit for this through the Child and Dependent Care Credit
- Life insurance premiums
Medical Expense vs. Dependent Care Credit
The cost of home care, used to enable the taxpayer to work elsewhere, can be applied either as a Medical Expense Deduction or using the Dependent Care Credit, but not both. For most families, it is advantageous to apply care expenses, which enable you to be gainfully employed, towards the Dependent Care Credit up to the maximum allowed ($3,000 for 2014), and then apply the remainder of those expenses as Medical Expense deductions. However, this may not always be applicable.
Qualifications for Deducting Elderly Dependent’s Expenses
- Age - there are no age qualifications for this credit.
- Health - strictly speaking, there are no health-related restrictions on claiming individuals as dependents. However, the number of items that are defined as “medical expenses” is much greater if the dependent is certified chronically ill by a healthcare professional and is following a prescribed plan of care. Typically, this means that the dependent is unable to perform 2 ADLs or requires supervision due to Alzheimer's disease or other conditions.
- Family Status - anyone regardless of family relation can be claimed as a dependent if they have resided with the primary tax filer for 1 year. If they have not, then the following relations are eligible: Parent, Grandparent, Step Parent, Father-in-law, Mother-in-law, Siblings (including Step, Half and In-Law), Aunt & Uncle.
- Financial (Tax Filer) - the Claimer must provide over half of the dependent’s financial support for the year in which they are filing. Support is considered in the year in which the bills were paid, not the year in which the services were provided. There is an exception to this rule when several persons together contribute 50% of the support. In this case, the contributors can prepare a mutually agreed-upon "Multiple Support Declaration" or MSD, which allows one of the them to claim the elderly as a dependent. Using a MSD, the claimer needs only to have contributed 10% of the total.
- Financial (Dependent) - to qualify as a dependent, the individual’s gross income for the year must be less than $3,950. While that sounds very low, certain income sources are exempt; most importantly social security and supplemental security income. Pension income is not exempt. There is not a hard asset limit for the dependent. However, those with even a moderate level of assets often generate income from those assets and are, therefore, disqualified because they exceed the income level limit.
Credit Amounts & Limits
Tax filers can deduct the amount of medical expenses that exceed 7.5% of their adjusted gross income (your AGI is found on form 1040, line 38). Or stated in another way, subtracting 7.5% (.075) of your AGI from your total medical expenses will yield your medical expense deduction.
For example, if your adjusted gross income was $50,000, and your total paid medical expenses were $10,000, your medical expense deduction would be $6,250 as shown in the table below. Assuming a typical tax rate of 16%, the annual tax savings would be approximately $1,000.
|7.5% of AGI
|Medical Expenses - 7.5% of AGI
||Medical Exp. Deduction
||$50,000 x 7.5% = $3,750
||$10,000 - $3,750 = $6250
How to File
Families need to use a Form 2441 to claim the dependent credit and Schedule A for the medical deduction.