As parents get older, there is an increased reliability on adult children to look after them. Through parental care, there are several ways tax laws can reduce your financial burden. By claiming your parent(s) as a dependent, the IRS can come of great assistance. To claim a parent is a little tricky and you must consider the following:
- Mom or Dad’s income, including Social Security.
- How much support you provide for living expenses.
- How much you contribute to a parent’s residential costs.
- How much of your parent’s medical bills you pay.
- Combined help of all siblings.
By claiming your parent, you will have an additional exemption on your income tax return. In addition, if you paid medical bills for your dependent parent, it is possible to deduct some of these costs. Further, by hiring a caregiver or a nurse, you can deduct those expenses and relieve your tax bill a little more.
Even if you meet many of the criteria listed, there are still some obstacles that could prevent claiming your parent as a dependent. The biggest obstacle is based upon how much your parent earns. The dependent parent may not make more than the exemption amount. According to John W. Roth, senior federal tax analyst, the income barrier represents taxable income. Much of the baby boomer generation has invested in stocks, bonds, and savings accounts, which can add up and potentially disqualify parents to be claimed as dependents.
“Social Security normally is excludable, but if they have other income, which in many cases means interest and dividends, some is taxable, Roth says.”So you want to start with that first in determining if the parent meets the income test.”
Another way to determine if you can claim your parent as a dependent is if you pay for more than half their living costs. When calculating how much you have supported your parents, take into account the fair-market room rental, food, medicine, and other support items. If your parents are using Social Security to pay for a portion of these expenses, it could limit how much you actually spend on your parents. However, your parents do not necessarily have to live with you in order to claim the exemptions. As long as you provide more than half support of their living, it is acceptable to put them down on your income tax return.
The medical costs incurred by your parents that you paid for can be itemized deductions on your income tax return as well. Medical costs must exceed 7.5% of your adjusted gross income before claiming them, however your parents’ medical bills can help meet the requirements. Even if your parents are ineligible to be claimed as dependents, you can still use their medical costs that you paid for as deductions on your own income tax return.
By splitting the costs of supporting your parents with your siblings a major financial burden could be avoided. For example, if Social Security is covering 40% of mom’s expenses, then you and your two siblings can split the rest of the costs at 20% a piece. This way more than half the support comes from her kids. Although, only one child can claim their mom as a dependent so the choice must be made between the siblings. Once mom is claimed by a single child, that child must fill out Form 2120 (Multiple Support Declaration) with their tax return. This will allow the child to claim mom as an exemption. As a provision, the child should get signed waivers from his/her siblings if the IRS ever questions the exemption or medical deduction claims. The multiple support agreement is not permanent either. It can be rotated from year to year so each sibling can share the deductions.
JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.