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2010 CCH Whole Ball of Tax
Tax Breaks Limited for Those Caring for Aging Parents; CCH Outlines When to Use and When to Forego
(RIVERWOODS, ILL., January 2010) – While there are several tax benefits available to parents of dependent children, not many tax breaks are available to adult children responsible for caring for aging parents, according to CCH, a Wolters Kluwer business and a leading provider of tax, accounting and audit information, software and services (CCHGroup.com). In addition, they may not always be in the adult child’s or parent’s best interest to take.
“Adult children have to overcome a number of hurdles to realize tax breaks for claiming a parent they are supporting,” said CCH Principal Federal Tax Analyst Mark Luscombe, JD, LLM, CPA. “In some instances, it may make sense, but in other cases the parent may be able to realize greater tax advantages on their own. Each family needs to look at what makes sense for their situation.”
Claiming a Parent as Dependent
The tax code has many provisions that support child-rearing, including the child tax credit and credits and deductions to help ease the cost of a child’s education. (For more detail on children and taxes, see the charts in Release 27.)
As with many of the child-related tax breaks, the first step that families caring for older relatives need to take to optimize the available credits requires proving the parent qualifies as a dependent. Among the tax benefits this can offer are allowing the taxpayer to claim an extra personal exemption, possibly deduct the parent’s medical expenses and use pre-tax dollars for the parent’s care.
However, in order for a parent to qualify as an adult child’s dependent, several requirements must be met. The parent must not file a joint return, unless only for a refund claim and there would have been no tax liability on separate returns. The parent also must be a U.S. citizen or live in the United States, Canada or Mexico. There are also two financial tests that must be applied:
- Gross income limitations. The parent’s gross income cannot be greater than the personal exemption amount, which is $3,650 for 2009. The parent’s gross income excludes all or part of their Social Security benefits, depending upon their income level. Even if a senior’s entire Social Security income were excluded, many seniors with modest incomes from pension, interest or investments would still be excluded by this test.
- Financial support requirements. The adult child also must furnish more than one-half of the support for the parent during the year in order to claim them as a dependent. If the parent lives in the child’s home, the child can count the fair market rental value of the parent’s lodging as part of the support provided. The full amount of the parent’s Social Security benefits is usually taken into account under this test, not just the portion that is included in gross income for income tax purposes.
The tax code does provide some flexibility on this provision where, for example, brothers and sisters pitch in to help with their parent’s expenses, but where no individual sibling contributes more than 50 percent of their parent’s support. In these instances, one child can claim the parent as a dependent as long as he or she provided at least 10 percent of the parent’s support, no one else provided more than 50 percent of the support and everyone else who provided 10 percent or more of the support signs a declaration that they won’t claim the exemption and for which years they are waiving this right. The child claiming the parent must hold onto this declaration as well as file IRS Form 2120, Multiple Support Declaration, with their tax return.
“When multiple siblings are all contributing to the care of a parent, this provision allows them to alternate which child claims the parent as a dependent year to year,” said Luscombe.
Deducting a Parent’s Medical Expenses
Establishing that a parent is a dependent is the precondition for another potential tax benefit – the ability of adult children to deduct the money they spend on a parent’s medical expenses.
Even with Medicare, seniors can rack up significant medical expenses. This can include many expenses that are considered “qualified long-term care” and are deductible as medical expenses but not reimbursable by Medicare. For example, the care needed by someone unable to bathe themselves or eat without assistance would normally qualify as deductible, but would be considered non-reimbursable “custodial care” under Medicare.
In addition to the parent being established as a dependent, there also are additional requirements that must be met in order for the child to take the medical expense deduction. These include:
- The taxpayer must itemize . The means that the total itemized deductions the child is claiming have to exceed the standard deduction amount in order to receive any benefit. For 2009, the standard deduction is $11,400 for married couples filing jointly and $5,700 for single filers.
- Total medical deductions must exceed 7.5 percent of AGI. For example, if a family had $75,000 in adjusted gross income (AGI) and paid a total of $6,000 in medical expenses, including the medical expenses of a dependent parent, they could deduct only $1,250. This is the amount by which their medical expenses exceed the $5,625 “floor” established by 7.5 percent of their AGI.
However, a parent with limited income may have a better chance of claiming the medical expense against his own income than having his medical expenses claimed by the child. For example, if the parent’s AGI was $3,600 and, building on the above scenario, $3,000 of the $6,000 in medical expenses belonged to the parent, he could deduct $2,730 ($3,000 less the $270 floor based on his AGI). So, rather than a $1,250 deduction claimed by the child for medical expenses, the parent could take a $2,730 deduction.
“Families claiming a parent will need to do the math to see which offers the greatest benefit,” said Luscombe. “In families with higher incomes, where realizing any medical expense deduction would be difficult, the parent may be in a better position to take the deduction. However, any amount declared by the parent as a medical expense could not also be claimed by the child as support in order to meet the dependency rule and claim the parent for the personal exemption.”
Tax Breaks for Long-term Care Insurance
All or part of the premiums for long-term care insurance also can be deducted as part of the medical expense deduction. For 2009, the deductible amount is no more than $320 a year in premium expense to cover someone age 40 or less, $600 for those age 41 through 50, $1,190 for those age 51 through 60, $3,180 for those age 61 through 70 and $3,980 for those age 71 or older. The figures are adjusted annually for inflation.
A child purchasing long-term care coverage for a parent can deduct the premiums only:
- When the parent is the child’s dependent;
- Up to the extent to which the medical expenses – including the parent’s – exceeds 7.5 percent of the taxpayer’s AGI; and
- Up to the maximum dollar amount of long-term care premium that is allowed to be deducted based on the parent’s age.
FSA and Dependent Care Credit for Seniors
One additional tax benefit is available for people whose dependent adult parents live in their home. If the adult child works and has to pay for care of the parent to make their own employment possible, the expenses can qualify for the dependent care credit or for pre-tax payment through an employer-sponsored flexible spending arrangement (FSA).
For 2009, the maximum dependent care credit is $3,000 for the care of one dependent. The credit equals 35 percent of qualifying expenses for taxpayers with AGI up to $15,000 and decreases with income to 20 percent of allowable expenses for AGI of $43,000 or more. Qualifying adult children can use IRS Form 2441 to claim this credit.
Under FSA rules for 2009, up to $5,000 of services can be excluded from employee’s gross income if the parent is a dependent.
“Just as with dependent care expenses for children, you have to decide whether the tax credit or pre-tax payment is more advantageous in your individual situation,” Luscombe observed.
About CCH, a Wolters Kluwer business
CCH, a Wolters Kluwer business (CCHGroup.com) is a leading provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. CCH is based in Riverwoods, Ill. Wolters Kluwer is a leading global information services and publishing company. Wolters Kluwer is headquartered in Alphen aan den Rijn, the Netherlands (www.wolterskluwer.com).
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