Tik Tok Tax Filings Are Due
Before you read on, know that this column is a resource only and not intended as professional consultation.
The price of everything continues to rise. Housing cost, food, transportation, and other living expenses give all of us sticker shock right now. The Federal Reserve continues to tweak the interest rates in hopes of taming inflation, but there are few signals that this strategy is working.
And then comes tax time. This year it is more important than ever to understand who and what can be deducted as you prepare your taxes. There are similarities and difference between child and dependent tax credits. Child tax issues are not the focus here. Today we are focused on the caregivers who are spending from their own family budgets to care for others.
What is a Dependent Person?
The Internal Revenue Service (IRS) defines a dependent as “Dependents are either a qualifying child or a qualifying relative of the taxpayer. The taxpayer’s spouse cannot be claimed as a dependent. Some examples of dependents include a child, stepchild, brother, sister, or parent.”
Remember, a spouse cannot qualify as a dependent. Therefore, a dependent receives financial support such as housing, food, clothing, and other costs that caregivers cover. This can be unrelated individual residing together where the filing party provides care and financial support. Once you identify someone as a dependent on your tax return this means that you have met the requirements to qualify them as your dependent. , you’re informing the IRS that you met the requirements to claim them as a dependent.
What is a Tax Credit
The tax credit is a deduction that reduces the amount of income subjected to taxes. Many employed family caregivers provide dependent care using their Flexible Savings Account from their employer, this is allowable under the Taxpayer Certainty and Disaster Relief Tax Act of 2020. The Dependent Tax Credit for 2022 is three thousand dollars for one person and a maximum of six thousand dollars for two dependents. The IRS new release on this issue is dated January 6, 2023:
“The 2021 enhancements to the credit for child and dependent care expenses have expired. The changes to the credit for child and dependent care expenses for 2021 under the American Rescue Plan Act of 2021 have expired. For 2022, the credit for child and dependent care expenses is nonrefundable and you may claim the credit on qualifying employment-related expenses of up to three thousand dollars if you had one qualifying person, or six thousand dollars if you had two or more qualifying persons. The maximum credit is thirty-five percent of your employment-related expenses. The more you earn the lower the percentage of employment-related expenses that are considered in determining the credit. Once your adjusted gross income is over forty-three thousand dollars the maximum credit is twenty percent of your employment-related expenses.”
The IRS created this easy survey tool to determine eligibility with this disclaimer “Conclusions are based on information provided by you in response to the questions you answered. Answers do not constitute written advice in response to a specific written request of the taxpayer within the meaning of section 6404(f) of the Internal Revenue Code.”
How to Calculate Expenses
So how do you quantify your expenditures on a dependent relative living in your home? TurboTax offers this advice in 2021. I recommend you use this information as a guide and not a bible.
“You must have provided more than half of your parent’s support during the tax year in order to claim them as a dependent. The amount of support you provided must also exceed your parent’s income by at least one dollar. When determining the monetary value of the amount of support you provide, you need to consider several factors:
- Calculate the fair market value of the room your parent occupies in your home. Ask yourself how much rent you could charge a tenant for the space.
- Consider the cost of food that you provide.
- Remember to include utilities, medical bills, and general living expenses that you also pay.
Compare the value of support you provide with any income, including Social Security, that your parent receives to determine whether you meet the support requirements. If you paid for your parent’s medical care, you may be able to claim medical expenses as an itemized deduction on Schedule A. Itemized deductions are beneficial when they exceed the amount of the standard deduction you are allowed to claim. You can deduct your parent’s medical expenses even if she does not meet the income requirement to be claimed as your dependent as long as you provide more than half of their support. Your total medical expenses, including all costs for prescription drugs, equipment, hospital care and doctor’s visits, must exceed 7.5 percent of your adjusted gross income to claim these expenses in 2020 and 2021.”
No Good Deed Goes Unpunished
I continue to advocate for the Credit for Caring Act and the simplification of the rules for families caring for dependent loved ones. We need to reward good behavior like the sacrifices caregivers are making to give vulnerable people dignity and love. These concepts are not found in the tax code. Sorry.
God Speed on Your Taxes
I wish for you a swift and painless tax filing this year and always. I encourage you to contact your legislators and demand they pass the Credit For Caring Act in the 2023 budget.