If you are supporting an elderly parent, you may qualify for some tax benefits from the U.S. government that reward you for your caregiving efforts. These tax benefits may include claiming your parent as a dependant on your tax return or deducting the contributions you made towards their medical expenses and care. In order to qualify for these tax breaks, you must first be aware of the tax benefits available and then determine whether you qualify. "It is important for all family caregivers to verify their eligibility and take advantage of these tax credits," said Allen Hager, chairman and CEO of Right at Home, Inc, an international in-home care franchise.
Tip #1: Determine if you are able to claim your elderly parent as a dependent.
If you support your elderly parent, you will want to claim him/her as a dependant on your tax return to receive the maximum amount of tax savings. You can then take an exemption for the 2013 tax year, which will equate to a reduction of your taxable income by $3,000. In order to determine if you qualify to claim your elderly parent as a dependent, you will need to pass the following four tests.
- Not a qualifying child test - Obviously, a qualifying child is another type of a dependent; however, the IRS wants to ensure a qualifying child dependent status (which has its own set of requirements) is not claimed using these four tests. This test is a non-issue for caregivers.
- Member of household or relationship test - If you are a son or daughter who is caring for a parent, you qualify since you meet the relationship test. You and your parent do not need to live with one another in order to qualify. In the case where a parent lives on their own or in assisted living, your parent may still qualify as a dependant as long as they pass the other tests.
- Gross income test - Your parent's gross income for the year must be less than $3,900. This amount excludes income from Social Security, disability payments or tax-exempt income. However, income received from other sources, such as withdrawals from retirement plans, pension benefits, rental income, or interest and dividends from investments would go towards a parent's income total, which could disqualify the parent as a dependant if he/she exceeds the income limit.
- Support test - The final test to complete is the support test. This test can be the most complicated to determine. In order to meet the requirements of this test, you must pay for over half of your parent's expenses. There are many factors involved in coming to this conclusion including food, housing, clothing, medical care, and transportation expenses.
More information on claiming your elderly parent as a dependent
Tip #2: File a "Multiple Support Declaration"
Another possible deduction comes into play when there are multiple siblings giving support for a parent. In this case, as long as a sibling provides at least 10 percent of the support and the combined support of all siblings makes up half of their parent's annual expenses, the parent could be claimed as a dependent. However, only one sibling can take the exemption for the parent. An agreement needs to be reached each year as to which sibling will take the exemption on their return. The sibling taking the exemption will need to file Form 2120, Multiple Support Declaration, and have all of the other siblings sign the form claiming that they will not take the exemption on their own return.
Tip #3: Determine if you are eligible for a dependent-care credit.
As a family caregiver, you may be eligible for the Child and Dependent Care Credit if you paid someone else to care for your elderly parent so you were allowed the opportunity to work or look for work. If eligible, you would be allowed a credit of up to 35 percent of the expenses paid for dependent care with the maximum amount of expenses being $3,000. This means the tax credit can be worth up to $1,050. To be eligible, you (and your spouse if filing jointly) must have earned income during the year, and the care recipient must be unable to physically or mentally care for him or herself. Care recipients must also be claimed as a dependent (if the recipient's income is under $3,900) on the caregiver's tax return, and you must identify all persons or organizations that provide care, according to the qualifications listed on IRS Form 2441.
Tip #4: Deduct your parent's medical costs.
If you were not able to claim your elderly parent as a dependant because his/her gross income was more than $3,900, there may still be a chance to receive tax savings this tax year. Medical expenses may be deducted on your tax return, along with your own expenses, for dependants and for individuals that would have been a dependant, except for the income guidelines. The IRS allows caregivers to deduct costs incurred from a parent's health care, such as hospitalization, prescription drugs, dental care and even long-term care services.
A complete list of deductible medical expenses is available in IRS Publication 502: Medical and Dental Expenses. The deduction is limited to medical expenses that are in excess of 10% percent of the caregiver's adjusted gross income (AGI) (7.5% if either your or your spouse was born before January 2, 1949).
List of medical expenses that can be written off
Honkamp Krueger & Co., P.C. is a CPA firm that searches for opportunities like the tax breaks above for their clients to ensure the maximum amount of tax savings.