Tax Tips
Tax Breaks for Supporting Elderly Parents - November 2004
Richard Scrivanich - Partner
Tax Breaks for Supporting Elderly Parents
Although supporting elderly parents can be financially draining, qualified taxpayers can get some financial assistance from Uncle Sam. Individuals who provide financial support for their parents may qualify for a dependency exemption on their tax returns. In addition, they may qualify for a medical expense deduction as well as a credit for dependent care expenses.
Understanding dependency
Although most filers are familiar with claiming dependency exemptions for themselves, their spouses, and their children, few are aware of the tax rules governing dependency exemptions for a parent or other relative. If you provide more than half the cost of supporting a parent or other qualified relative, you may be entitled to a dependency exemption. Support includes food, lodging, clothing, transportation, recreation, medical and dental care, and similar necessities. The dependent’s own funds are not considered support unless they are actually used for support.
Qualifying for the deduction
The parent or relative must be a U.S. citizen, or a resident of the United States, Canada, or Mexico. Your parent need not live with you to qualify as a dependent. Certain relatives, however, must reside with you in order for you to take a dependency exemption. The dependent must not file a joint return with anyone, unless the return is filed only to receive a refund for taxes paid. Furthermore, the dependent’s gross income must be less than the personal exemption amount which is $3,100 for 2004. (Note: this limit does not apply to your children who are less than age 19 or to full-time students under age 24). Tax-exempt income doesn’t count toward the personal exemption amount, nor does the tax-exempt part of Social Security.
Filing a multiple support agreement
In some cases, several siblings join together to support an elderly parent. If you and your siblings together contribute more than half your parent’s support, but no one of you provides more than 50% of that support, you can file a multiple support agreement.” A multiple support agreement allows any one of you who furnished over 10% of the dependent’s support to claim the one available exemption, if the others agree. Each contributor signs a Form 2120 and attaches the form to his or her tax return. The person who claims the exemption can alternate from year to year.
Deducting medical expenses
If you pay more than half your parent’s support, you may be able to deduct any medical expenses you pay on his or her behalf, even if your parent earned too much for you to claim a dependency exemption. You may add your parent’s qualifying medical expenses (including health insurance premiums) to your own medical expenses and deduct the expenses which exceed 7.5% of your adjusted gross income (AGI).
Qualifying for the dependent care
A dependent care tax credit is available for individuals who, in order to be able to work, pay someone to care for a mentally or physically disabled parent. The credit is a percentage, based on your AGI, of the amount of dependent care expenses you pay. Expenses for care of a disabled dependent also qualify for a medical deduction. You must choose to take either the itemized deduction or the dependent care credit, but not both.
If you have any questions regarding the tax breaks discussed above or any other tax matters, please give me a call at (562) 698-9891.
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