Taxes and Caring for an Elderly Parent
Did you know the United States tax code is about four million words long? Longer than seven versions of War and Peace and at 73,000 plus 8 ½ x 11 sheets of paper it is just under four times the number of words in ALL of the Harry Potter books put together. With April 15 right around the corner, there are a few questions to ask yourself or share with your tax professional before you file.
The first thing that often comes to mind when considering dependents is the parent/child relationship. In many cases, parents claim their children as dependents until they become adults. It also works the other way around. If you cared for an elderly parent, your parent may qualify as your dependent, resulting in additional tax benefits for you. Once you determine that both of you meet IRS criteria, you can claim your parent as a dependent on your tax return.
Your parent must first meet income requirements set by the Internal Revenue Service to be claimed as your dependent. To qualify as a dependent, your parent must not have earned or received more than the exemption amount for the tax year. This amount is determined by the IRS and may change from year to year. Current exemption amounts can be found in IRS Publication 501, Exemptions, Standard Deduction, and Filing Information. Generally, you do not count Social Security income, but there are exceptions. If your parent has other income from interest or dividends, a portion of the Social Security may also be taxable.
You must have provided more than half of your parent's support during the tax year in order to claim them as a dependent. When determining the monetary value of the amount of support you provide, you need to consider several factors.
Calculate the fair market value of the room your parent occupies in your home. Ask yourself how much rent you could charge a tenant for the space.
Next, consider the cost of food that you provide. Don't forget to include utilities, medical bills and general living expenses that you also pay. Compare the value of support you provide with any income, including Social Security, that your parent receives to determine whether you meet the support requirement. The amount of support you provided must exceed your parent's income by at least one dollar.
Deducting medical expenses
If you paid for your parent's medical care, you may be able to deduct the expenses. You can claim medical expenses as an itemized deduction on Schedule A. Itemized deductions are beneficial when they exceed the amount of the standard deduction you are allowed to claim. Total medical expenses, including the cost of prescription drugs, equipment, hospital care and doctor's visits, must exceed 10 percent of your adjusted gross income for you to claim these medical expenses. The IRS understands the heavy burden that medical expenses sometimes create and has made an exception for this deduction.
You can deduct your parent's medical expenses even if she does not meet the income requirement to be claimed as your dependent as long as you provide more than half of their support.
There is a temporary exemption from Jan. 1, 2013 to Dec. 31, 2016 for individuals age 65 and older and their spouses. If you or your spouse are 65 years or older or turned 65 during the tax year you are allowed to deduct unreimbursed medical care expenses that exceed 7.5% of your adjusted gross income. The threshold remains at 7.5% of AGI for those taxpayers until Dec. 31, 2016.
Dependent care credit
The child and dependent care credit is a non-refundable tax credit. It can be claimed by taxpayers who pay for the care of a qualifying individual and meet certain other requirements. If your parent is physically or mentally unable to care for himself, he is a qualifying individual.
In order for you to qualify for the credit, you must meet certain requirements. You need to have earned income and work-related expenses to qualify. This means that the care must have been provided while you were either working or looking for work. In addition, you must be able to properly identify your care provider. This includes giving the provider's name, address and identifying number (either Social Security number or employer identification number). If you are married but file a separate return from your spouse, you may not claim this credit.
Do Your Parents Need to File?
According to the Tax Policy Center, more than half of all seniors in the US won’t need to file income tax returns this year because their incomes are under the IRS filing requirement. To help decide, the first step is taking a look at their gross income. Gross income includes all income received that is not exempt from tax, but does include Social Security benefits. For a single person over the age of 65, the ceiling for gross income is $10,750, for a married couple it is $20,900.
There are special financial situations that will make filing a requirement, even if the gross income falls below the IRS threshold. For example, net earnings from self-employment of $400 or more or any special taxes owed to the IRS such as IRA tax penalties might make filing necessary. At www.doyouneedtofile.info the IRS offers a lit of likely financial situations and a series of questions that will help you determine whether your parent is required to file.
For both you and your parents it is always better to be safe than sorry when dealing with the IRS. Make sure you’ve talked to your loved ones about filing. Be sure they are not going to fall victim to the many scams that are out there right now taking advantage of the complexities of the tax code and the looming deadline approaching. Keep the lines of communication open and involve an objective third party such as an accountant or certified tax preparer when needed.