Don't Mess With Taxes

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Every year, families gather at Thanksgiving. In many cases, it's a chance for relatives and friends who haven't seen each other for a while to reconnect.

Some families, however, are much closer proximity-wise. They see each other all the time.

And in some of those cases, family members are caregivers.

That's why November is a good choice as National Family Caregivers Month. It is formal recognition, as noted in President Joe Biden's proclamation, that millions of Americans provide crucial care and assistance to parents, children, siblings, and other loved ones.

Many of these caregivers take time off or permanent leave their paying jobs to provide care to family members. And at some point in our lives, most of us will likely need to be a family caregiver.

That's not easy, either emotionally or financially, for many caregivers and their families. It's not easy for the person, especially older adults, who must accept the help.

From the cold hard cash perspective, the Caregiver Action Network says the value of the services family caregivers provide for "free," when caring for older adults, is estimated at $375 billion a year. That's almost twice as much as the $158 billion that's actually spent on homecare and nursing home services combined.

Tax help for providing care: Uncle Sam does provide some financial help for those providing care, generally though family-friendly tax breaks.

The most popular ones involve minor children. They include the —

• Child Tax Credit of $2,000 for each qualifying child younger than 17;
• Additional Child Tax Credit, which could produce a partial tax refund of up to $1,500;
• Adoption tax credit, which for the 2022 tax year is worth up to $14,980 to help defray the cost of adopting a child;
• Child and Dependent Care Credit, which helps parents cover some of the costs incurred when someone looks after their children while they work; and
• Earned Income Tax Credit (EITC), which offers substantial tax help to lower- and moderate-income families. For the 2022 tax year, it could be worth up to $6,935. Plus, if that's more than your tax liability, you get the excess back as a tax refund.

Care for older family: Many families, however, face care issues for relatives who are older. There's some tax help here, too.

First, note the full name of the Child and Dependent Care Credit. While many use it to offset childcare costs, it can be claimed for qualifying care for an adult necessary so you can work.

This includes care for your spouse, if that person cannot take care of him/herself. It also applies to any other person, not just a relative, needing care and whom you claim as a dependent on your tax return.

In both the spouse and other person cases, those individuals must have lived in your home at least half the year. And again, you need to hire the care so that you can go to your job (or look for one).

Tax credit for older, other family: The Child Tax Credit is great if your children are 16 or younger at the end of the tax year. But many families include older children and adults who depend on you to provide for most of their needs, including financial support, housing, food, clothing, and other necessities.

That's where the Credit for Other Dependents comes into tax play. It's worth up to $500 for each qualifying person, who essentially is someone who doesn't qualify for the Child Tax Credit.

These dependents include:

• dependent children age 17 or older, such as youngsters who are in college;
• children with an Individual Taxpayer Identification Number (ITIN) instead of a Social Security number, which is required to claim the Child Tax Credit; and
• adult dependents, which for many folks my age means our elderly parents.

That last group — adult dependents — typically are actual relatives. However, it's not limited to formal family members. Any adult who depends on you for support, related or not, could qualify as long as that person meets the following four tests.

1. The person is not your qualifying child. For tax purposes, this means the youngster doesn't meet Internal Revenue Service requirements to be claimed under the Child Tax Credit (CTC). This typically isn't a concern, as most families want to claim the substantially larger CTC, and possible refundable Additional Child Tax Credit, for their younger qualifying children.

2. The person must be a member of your household or meet the relationship test. The IRS is specific when it comes to the relationship test. It is a person or any age who is related to you in a variety of ways noted in the box to the right. 

In addition, these designated relatives don't have to live with you for the full year, something many of us are thankful for from tax and personal space perspectives!

If, however, the person is not an actual relative, he or she could qualify as one for tax purposes if she or he lived with you for the whole year.

3. The person's income must not exceed a certain amount. This is known as the gross income test, and the IRS is looking at how much money your potential dependent made. This includes all taxable unemployment compensation, taxable Social Security benefits, and certain amounts received as scholarship and fellowship grants. For the 2022 tax year, the person's earnings cannot exceed $4,400.

4. You and the person must meet the support test. Here the IRS looks at what you, the person claiming the credit, contribute to the potential dependent's well-being. Generally, you must provide more than half of a person's total support during the calendar year.

Since family situations can be complex, the IRS provides exceptions for exceptions for multiple support agreements, children of divorced or separated parents (or parents who live apart), and kidnapped children.

In addition to meeting the four tests above, there are a couple of other qualifying relative/dependent things to note.

There is no age test. The other dependent can be any age. However, the person must be a U.S. citizen, U.S. national, or U.S. resident alien.

More caregiver tax help: Your tax adviser or tax software can help you work through these situations and numbers.

IRS Publication 4012 offers a side-by-side overview of the dependent claiming rules. You can find even more in the dependents sections of IRS Publication 17 and IRS Publication 501. Both of the publications are full of interactive links.

And speaking of interactive, you can use the IRS' online tool Whom May I Claim as a Dependent? The questions and answers format will use the information you use to come up with the answer for you.

Finally, note that when a dependent-related tax benefit is a credit, like the one for other dependents, that's better than a tax deduction. Tax credits provide dollar-for-dollar reduction of your tax liability. And some, like the previously noted EITC or Additional Child Tax Credit, could get you a refund even if you don't owe the Internal Revenue Service.

More caregiver general info, help: If you are a caregiver or looking for one, there are many places that want to help. They include —

• Family Caregiver Alliance
• National Alliance for Caregiving
• National Family Caregivers Association
• National Institutes of Health, National Institutes on Aging, Caregiving

In connection with taxes, you also might find these prior blog posts of interest:

• Senators want to enhance the adoption tax credit
• Don't miss out on EITC, but note the 2022 tax return changes
• States pick up federal Child Tax Credit slack as child poverty makes a comeback

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