NEW YORK — In a tough economy, millions of Americans have acquired new financial dependents: their parents. If you're among them, your tax adviser should be the first to know.
"There are tax breaks that can help you if you're financially supporting a parent," says Karen Schaeffer, a Rockville, Md., financial planner. She knows firsthand: her mother-in-law lived with her and her husband for three years; later, her own mother spent more than six years in their house before moving into an assisted living residence.
Schaeffer's experience is increasingly common. A Pew Research Center analysis of Census Bureau data shows the multi-generational American household has been staging a comeback since 1990, in a trend that accelerated sharply during the 2008-2009 recession. A new survey of family caregivers finds that 41 percent now have one or both parents living with them and 21 percent are supporting at least one parent in an assisted living facility, nursing home, or other community living residence.
If you meet IRS requirements, there are tax strategies and deductions to help with the costs, and your tax accountant may have more.
Each exemption on your return cuts your taxable income by $3,700. You can claim one for Mom even if she doesn't live with you on four conditions:
- Her 2011 income (excluding all or most of her Social Security) didn't exceed $3,700.
- You paid more than half her total expenses for the year.
- She doesn't file a joint return with someone else unless it's to claim a refund.
- She's a citizen or resident alien of the U.S., Canada, or Mexico. (For more information, go to the IRS website.)
The hurdle in many families: siblings share the cost of helping their parents, but none contributes enough to claim the exemption. The work around: If your combined assistance equals more than half Mom's support, and you each provide more than 10 percent of that support, you can take turns claiming the exemption, says Bob Leins, a Rockville, Md., CPA: "If you file a Multiple Support Declaration with the IRS, you can rotate the exemption annually."
Can't claim an exemption for Mom because her income is too high and/or she files a joint return? If you pay more than half of her support, and she passes the citizenship test, you can claim an itemized deduction for medical expenses you paid on her behalf. Of course, you can only take a medical deduction to the extent that your total unreimbursed expenses exceed 7.5 percent of your adjusted gross income -- but the cost of Mom or Dad's care may put you over the top.
Deductible medical expenses include the cost of disability-triggered home improvements like the installation of ramps, wider doorways and stair-lifts, says Leins. In Mom's house, those changes may be fully deductible. In yours, they're deductible to the extent that their cost exceeds any increase to the market value of the house, says Rosanne Rogé, managing director of R.W. Rogé & Co, a Bohemia NY financial adviser. If you installed an $11,000 elevator that boosts the value of your home by $5,000, for example, you have a $6,000 medical deduction.
If your parent is in an assisted living residence, ask the facility how much of its monthly cost is attributable to deductible medical expenses. Room and board generally isn't deductible, but there are exceptions. "I have a client who writes checks for $5,000 a month to his mother's nursing home, and it's all a deductible medical expense because her living there is documented as medically necessary," says Mark Nash, a partner at Pricewaterhouse Coopers in Dallas.
If you were unmarried at year-end and can claim an exemption for Mom, you may be able to file as a head of household even if she doesn't live with you and that would lower your tax rates. If you earn $70,000 a year, filing as head of household rather than a single taxpayer saves you about $2,000 in 2011 federal tax, says Alan E. Weiner, a CPA in Melville, N.Y.
If Mom lives with you, you can claim a tax credit for what you pay someone to care for her so you can go to work. That's true even if her income exceeds $3,700, as long as you provide more than half of her support, says Bob Scharin, senior tax analyst for Thomson Reuters.
But Scharin says many people are better off using a dependent care flexible spending account (FSA) to pay for adult day care. The FSA is an employee benefit offered by most large companies. It lets you set aside up to $5,000 pretax a year of your salary to pay for work-related dependent care expenses — and this money isn't subject to federal income tax or FICA tax. If you're in the 25 percent federal bracket, that saves you about $33 in total federal tax for every $100 you spend. Your state tax savings depend on state law.
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