Federal Tax Credits and Deductions for Family Caregivers

Caring for children, elderly family members, and others can be expensive as well as physically and emotionally demanding. Although the IRS doesn’t offer emotional support, federal tax credits and deductions for caregivers can significantly offset the cost.

These tax benefits can provide welcome financial relief as the number of Americans caring for elderly family members and other adults increases. A 2021 study by the AARP reported roughly 48 million people in the U.S. providing unpaid care to an adult family member or friend, at an average annual cost of $7,242.

Federal tax credits and tax deductions for caregivers can help offset many expenses, making them a valuable tool for families and individual taxpayers who care for or help support loved ones. Here are some of the most popular tax benefits currently available to caregivers.

Child Tax Credit

The child tax credit (CTC) provides a tax credit of up to $2,000 for each eligible dependent who is under the age of 17 at the end of the tax year. The maximum value of the CTC drops for single filers with adjusted gross income above $200,000, or above $400,000 for married taxpayers filing jointly. Up to $1,500 of the CTC is refundable.

For the CTC, the definition of “child” includes your natural or adopted child, stepchild, grandchild, younger sibling (including half-siblings), step-sibling, or foster child (as long as a recognized government agency placed the child in your care). The child must have lived with you for more than half the year and qualify as your dependent on your tax return.

Dependent Tax Credit

Even if your dependents don’t meet the requirements for the CTC, they may qualify you for a different tax credit. The credit for other dependents can be worth up to $500 for taxpayers who support one or more children or adults. Your dependent does not have to be a relative or meet an age test to qualify for the credit for other dependents, although many filers use it to claim a tax benefit for dependent parents and for children above the age of 17.

Like the CTC, this credit begins to phase out at incomes of $200,000 for single filers and $400,000 for married taxpayers filing jointly. You cannot claim this credit and the CTC for the same dependent.

Child and Dependent Care Credit

If you paid someone else to take care of a child under age 13 or a dependent adult while you worked, you may qualify for the child and dependent care credit (CDCC). Expenses for day care, preschool, nannies, babysitters, day camps, before-school and after-school programs, and similar providers may qualify toward the CDCC.

The amount of the credit varies with the number of dependents you have and your adjusted gross income. The maximum credit is 35% of expenses up to $3,000 per year for one dependent, or $6,000 if you paid expenses for more than one dependent.

Medical Expense Deduction

Qualified, unreimbursed medical expenses above 7.5% of adjusted gross income are deductible for taxpayers who itemize deductions on their tax return. If you incur high medical costs for a dependent (or yourself), you may wish to compare the potential value of itemizing versus claiming the standard deduction.

Flexible Spending Accounts

If your employer offers a flexible spending account (FSA) as part of the benefits package, you may be able to use pre-tax contributions made by you or your employer (or both) to cover healthcare costs for yourself and your dependents.

These accounts can come in other flavors, too: the limited purpose FSA, for dental and vision expenses, and the dependent care FSA (DCFSA). Caregivers can use DCFSA funds to pay for qualified care expenses, including day care, preschool, nannies, day camps, before-school and after-school programs, and other care while you work. Adult day care and certain other care services for adult dependents can also qualify as DCFSA-eligible expenses.

The IRS caps 2023 contributions for these accounts at $5,000 for DCFSAs and $3,050 for healthcare and limited purpose FSAs, but employers can choose to set a lower limit. Try not to over-fund an FSA, because you’ll forfeit contributions unspent by the end of the year. Also note that you cannot claim the child and dependent care credit for dependent care expenses paid with DCFSA funds.

Health Savings Accounts

A health savings account (HSA) is a versatile and tax-efficient vehicle that allows qualified taxpayers to contribute pre-tax dollars. Interest and investment earnings accumulate tax-free, and withdrawals for qualified medical expenses are untaxed. Caregivers can use HSA funds from their own account to pay medical expenses for a dependent, with certain limitations.

Besides the normal list of HSA-approved medical expenses, some additional expenses common for older adults qualify for tax-free HSA withdrawals. These include costs for nursing home care and home healthcare; wheelchairs, canes, and walkers; dentures, hearing aids, and other medical devices; and even home improvements such as installing ramps or widening doorways, if these improvements are documented as medically necessary.

Qualifying for Caregiver Tax Incentives

Most caregiver tax benefits are available only for expenses incurred to care for an individual that taxpayers claim as a dependent on their tax return. The dependent can be a qualifying child, a qualifying relative, or another adult who meets the eligibility requirements of a qualifying relative.

A dependent adult relative must have gross income under $4,400, and the caregiver must provide more than half of the dependent’s total support for the year. Unrelated or more distantly related adults may also qualify as dependents if they meet all other requirements and live with the caregiver all year. Different rules may apply for disabled dependents.

We can help you identify and document your eligibility for tax credits and deductions based on your role as a caregiver. Contact your CRI advisor today to make sure you don’t miss out on these valuable tax benefits.