Planning for elder care involves both emotional and financial considerations. With rising costs and evolving tax laws, understanding how to fund care and leverage available tax benefits is essential. Many individuals assume their health or disability insurance will cover long-term care, but coverage is often limited. This article will explore funding sources, living arrangements, and tax strategies to help you navigate options for elder care.

Funding Elder Care

Elder care is typically financed through a mix of personal savings, public programs, and private financial tools. Government programs, such as Medicaid and various state-level assistance programs, offer different types of support for seniors and caregivers. These programs are often based on income and/or assets and may vary by state. Private financing options may include long-term care insurance, reverse mortgages, life insurance with care riders, Flexible Spending Accounts (FSAs), annuities, or elder care trusts.

Living Arrangements

Families often choose between living with a family member or residing in a care facility, such as an assisted living facility or a nursing home. There are many considerations when deciding, including the elder's care needs, family dynamics, financial costs, emotional well-being, and long-term sustainability of the arrangement. While assisted living facilities may offer comprehensive services, they often come at a higher monthly cost compared to in-home care.

The elder's required level of care must be carefully assessed. For instance, if the older adult needs help with bathing, dressing, toileting, or eating, professional care may be more appropriate. Similarly, chronic conditions or rehabilitation may require skilled nursing or 24/7 supervision, often available in assisted living. Dementia or Alzheimer's may necessitate memory care services that are not feasible at home.

In some instances, living with a family member is the better option. It provides emotional closeness and daily companionship, as well as a familiar environment and routines. In addition, living with family members may offer significant cost savings compared to assisted living facility or nursing home care.

Financial Considerations and 2025 Tax Benefits for Caregivers

Elder care can be very costly. Assisted living often requires out-of-pocket payments in addition to Medicare. Home care may be more affordable, but costs can add up with increasing needs. Therefore, tax benefits of home care should not be overlooked. Recent tax law changes have introduced new opportunities for caregivers supporting elderly dependents.

Child and Dependent Care Credit (CDCC)

The Child and Dependent Care Credit (CDCC) is a nonrefundable federal tax credit of 35% (50% for 2026 and after) of qualifying expenses, up to $3,000 for one dependent or up to $6,000 for two or more dependents, depending on your income. The CDCC helps working individuals offset the cost of care for a dependent, including elderly relatives who are physically or mentally incapable of self-care. The CDCC is a tax credit that is based on earned income and is only available if the care enables the taxpayer to work or seek employment. In addition, qualifying expenses must be for care rather than for medical treatment. It should be noted that the CDCC has an income-based phase-out, however, it doesn't fully phase out. Once your AGI exceeds $43,000 the credit percentage remains fixed at 20%.

Credit for Other Dependents

Another important credit for home care providers is the $500 nonrefundable credit for "other" dependents. To claim this credit, the dependent must be a US citizen, you must provide more than half of their financial support, their gross income must be below $5,200 for 2025, they can't file a joint tax return, and you must claim them as your dependent on your tax return. This credit phases out at $400,000 for joint filers.

Medical Expense Deductions

For families that choose home care, medical expenses for their loved ones can become burdensome. Unreimbursed medical expenses that exceed 7.5% of Adjusted Gross Income may be deductible on the caregiver's tax return if the elder is a dependent.

Deductible medical expenses include:

  • Fees paid to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, and other licensed practitioners
  • Hospital and clinic services
  • Nursing home care
  • Inpatient treatment for addiction or mental health
  • Acupuncture treatments
  • Long-term care insurance premiums
  • Prescription drugs and insulin
  • Medical equipment and supplies
  • Service animals and related care
  • Home modifications for medical needs (e.g., ramps, elevators)
  • Eyeglasses and contact lenses
  • Hearing aids and batteries
  • Crutches, wheelchairs, walkers
  • Prosthetics and orthopedic shoes
  • Oxygen equipment and supplies
  • Mileage, tolls, parking, and public transit costs for medical care

Dependent Care Flexible Spending Accounts (FSAs)

Some employer-sponsored plans offer Dependent Care Flexible Spending Accounts (FSA), which is another tax strategy that caregivers can use when providing home care for older dependents. Dependent Care FSAs allow pre-tax contributions of up to $5,000 per household for elder care expenses, such as adult day care, in-home care, medical supplies, and certain transportation costs.

Final Thoughts

There are a lot of emotional and financial decisions to make when caring for an older adult. As caregivers, you may be able to benefit from various tax deductions and credits to reduce your tax burden. Please reach out to our Estate and Trust team for more information.