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2011 CCH Whole Ball of Tax
Sandwich Generation and Health Care: CCH Reviews Tax Ramifications for Caring for Aging Parents and Young Adult Children
(RIVERWOODS, ILL., January 2011) – Millions of people care for aging parents and many of them also find themselves providing for young adult children as the economy still struggles to rebound, according to CCH, a Wolters Kluwer business and a leading provider of tax, accounting and audit information, software and services (CCHGroup.com). The tax laws offer some breaks when it comes to supporting the health care needs of the sandwich generation, but people need to decide what’s best for them.
“New tax laws make it easier for parents to take tax breaks for a young adult child’s health care costs,” said CCH Principal Federal Tax Analyst Mark Luscombe, JD, LLM, CPA. “However, there are still many obstacles in realizing tax breaks for claiming an aging parent they are supporting, and which moves are most tax advantageous isn’t always obvious.”
Claiming Tax Breaks for Young Adult Children’s Health Care
Under the Patient Protection and Affordable Care Act (Patient Protection Act) passed in 2010, parent’s can now take deductions for medical expenses for children under age 27. Previously, the child had to be under age 19 or a full-time student under age 24.
However, causing many parents confusion is a non-tax provision in the Patient Protection Act that requires health insurers to allow children under age 26 to be covered on a parent’s policy.
“For tax purposes, you can deduct medical costs for children under age 27, but health insurers are only required to cover children under age 26 on a parent’s plan,” said Luscombe. “So that one-year age differential is creating some confusion.”
Additionally, Luscombe clarified, for tax purposes, it does not matter if the child is covered under the parent’s health insurance plan, or even considered a dependent.
“If the child is under age 27 and incurs a medical expense, which the parent pays, the parent can claim the deduction on their taxes whether they are a dependent or not,” said Luscombe.
As with any medical expenses, however, in order to realize the tax deduction:
- The taxpayer must itemize. To qualify, the total itemized deductions the parent is claiming have to exceed the standard deduction amount in order to receive any benefit. For 2010, 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 adjusted gross income (AGI). Under the Patient Protection Act, this 7.5 percent threshold for itemized deductions will increase to 10 percent, but not until 2013.
Claiming an Aging Parent as Dependent
The tax code is more restrictive when it comes to claiming medical expenses an adult child caregiver may incur in supporting an aging parent. First, several requirements must be met. For example, the aging 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. Additional requirements include:
- Gross income limitations. The parent’s gross income cannot be greater than the personal exemption amount, which is $3,650 for 2010. 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 caregiver 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 caregiver’s home, the caregiver 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 siblings pitch in to help with their parent’s expenses, but where no individual sibling contributes more than one half of their parent’s support. In these instances, one sibling 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 sibling claiming the parent must hold onto this declaration as well as file IRS Form 2120, Multiple Support Declaration, with their tax return.
“This provision allows siblings to alternate who claims their parent as a dependent year to year,” said Luscombe.
Seniors’ Medical Expenses Add Up
Once the parent is determined to be a dependent, the adult child caregiver must still itemize and must have total medical expenses that exceed 7.5 percent of AGI.
Seniors can accumulate significant medical expenses even with Medicare. These expenses can include “qualified long-term care” and medical and prescription drug expenses not reimbursed 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.
Additionally, all or part of the premiums for long-term care insurance also may qualify as medical deductions, which an adult child caregiver may take if their parent is a dependent. For 2010, the deductible amount is no more than $330 a year in premium expense to cover someone age 40 or less, $620 for those age 41 through 50, $1,230 for those age 51 through 60, $3,290 for those age 61 through 70 and $4,110 for those age 71 or older. The figures are adjusted annually for inflation.
Tying Together Family Medical Deductions
Assuming requirements are met, a family – particularly one that includes three generations – could benefit from pooling all the medical expenses in order to qualify for the medical deduction.
For example, if a family had $80,000 in AGI and paid a total of $8,000 in medical expenses, including the medical expenses of a young adult child and an aging parent, they could deduct $2,000. This is the amount by which their medical expenses exceed the $6,000 “floor” established by 7.5 percent of their AGI ($80,000 x 7.5 percent). To do this, however, requires that they itemize. As a result, they would generally only itemize if their deductions exceeded the $11,400 standard deduction for joint filers.
Meanwhile, the young adult child could still claim a standard deduction of up to $5,700 for a single filer and the aging parent would be able to also claim a standard deduction. The amount of the deduction for dependents ranges from $950 - $5,700.
“Intergenerational families may need to calculate a few different scenarios to see which offers the greatest benefit,” said Luscombe. “Families with higher incomes will have a more difficult time realizing any medical expense deduction. In these cases, a young adult child or aging parent may be in a better position to take the deduction, assuming total itemized deductions exceed what they could realize from the standard deduction.”
Another Tax Benefit: Comparing FSA and the Dependent Care Credit for Seniors
Adult children caregivers may also be able to get some tax relief if they have to pay for care of a dependent parent to make their own employment possible. The expenses for this care can qualify for either the dependent care credit or for pre-tax payment through an employer-sponsored flexible spending arrangement (FSA).
For 2010, 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 caregivers can use IRS Form 2441 to claim this credit.
For 2010, FSA rules allow up to $5,000 of services to be excluded from employee’s gross income if the parent they are caring for is a dependent.
“Again, taxpayers need to run the numbers to determine if they are better off taking the dependent care tax credit or using an FSA pre-tax payment,” said Luscombe.
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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