As a family steward, you are tasked with making financial decisions for your family from birth to death, essentially. While we grow older, so do our parents. Many “Gen Xers” and “Baby Boomers” are known as the “sandwich generation” because of their unique tasks of caring not only for their own children, but also responsible for caring for their aging parents. This can add financial stress as older populations tend to need more medical care.
But, there are four provisions in the tax code that can provide some financial relief for family stewards caring for multiple generations. Let’s look at those.
1. Credit for Children and other Dependents
You may qualify for a $2,000 tax credit per child (under 16) and a $500 credit for a dependent parent, even if they don’t live with you. You must be able to claim this parent as your dependent and provide at least half of their support – including food, clothing, shelter, utilities, healthcare, and other expenses. Since this is a tax credit, this means it is a reduction in the amount of taxes you would otherwise owe. If you think you qualify for this credit, review the IRS guidelines.
2. Flexible Spending Account
A flexible spending account (FSA) is a benefit that may be offered by your employer. An FSA allows you to direct an amount of your salary or wages, up to $5,000 annually, to an account you can use to pay childcare, elder care, or medical expenses. You don’t pay taxes on this amount, so this can be a smart way to pay for elderly dependent care with tax-free dollars. You should check your employer’s plan documents to verify what types of expenses are eligible for payment. Again, you must be able to claim the person providing care for as a dependent on your tax return.
3. Child and Dependent Care Credit
For those who are married and filing jointly, if your earned income is between $40,000 and $400,000, you may be eligible for a tax credit equal to 20% of expenses you paid to someone else to provide care for an eligible dependent so you could work or look for work. Dependent parents must have been mentally or physically incapable of taking care of themselves and must have lived with you for six months or more. You will have to provide detailed information about the care provider, who typically must not be someone you can claim as a dependent or your spouse. To learn more about this credit, see IRS Publication 503.
4. Medical Expense Deduction
If you are paying qualified medical expenses for a senior dependent that are above 7.5% of your adjusted gross income, you may be able to claim this deduction on your return. Meaning, if your adjusted gross income is $100,000, and you have paid more than $7,500 in qualified medical expenses for the dependent during the year, the amount in excess of $7,500 could be deductible.
Being a family steward means making smart financial decisions for current and future generations. At Hiley Hunt Wealth Management, advising family stewards and helping them create a plan for financial security is what we do.