Help From Uncle Sam When Helping Elderly Parents

You’ve heard the saying: What goes around comes around. Your parents paid a lot of bills while raising you and now it may be your turn to help take care of them. If this is your situation, you may be entitled to some tax breaks you didn’t know about. Here are three possibilities:

Support includes the cost of items like food, medical and dental expenses, a place to live, transportation and furniture.

1. Deduct Your Parent’s Medical Expenses

If you pay more than half your parent’s support, you can include medical expenses that you pay for him or her along with your own family medical costs on your federal income tax return for itemized deduction purposes. The good news is the tax law allows this even when your parent has too much income to actually be claimed as a dependent on your return (more on that later).

Many people mistakenly believe they cannot deduct a parent’s medical costs unless the parent also lives with them and can be claimed as a tax return dependent. But that is not true. The only requirements are that you must pay over half of your parent’s total support for the year and you must pay for medical bills included on your return.

Now for the bad news: In 2016, the total unreimbursed medical expenses must generally exceed 10 percent of your adjusted gross income (AGI) before you can actually claim any write-off. Previously the threshold was 7.5 percent. If you or your spouse will be age 65 by the end of the year, the lower threshold, 7.5 percent applies until 2017. Unreimbursed expenses include your share of health insurance premiums, co-payments for doctor visits and prescription drugs, qualified long-term care insurance premiums subject to age-based limits, dental and vision care costs, amounts paid before insurance deductibles are covered, and medical expenses paid for your parent if you provide more than 50 percent of support.

Even if you can deduct medical expenses, you can only write off the amount above the 10 percent of AGI floor. While this hurdle can seem difficult to clear, it is certainly possible if you pay significant medical costs for a parent that you provide more than half of support. You can also include a portion of the fees you pay for your parent to enter and live in a lifetime care retirement community that provides medical and nursing services (sometimes called a continuing care retirement community). Fees paid to these communities can be large enough to get you over the 10 percent of AGI threshold.

2. Claim Your Parent as a Dependent

The rules are stricter for claiming a parent as a dependent on your federal income tax return. To claim the $4,050 dependency exemption for 2016 (up from $4,000 in 2015), you must satisfy all of the following requirements:

  • You provide more than half of the support for your parent this year (including medical bills).
  • Your parent’s gross income for 2016 is less than $4,050 not counting nontaxable income like Social Security (or $4,000 in 2015).
  • Your parent does not file a joint federal income tax return for this year.

If you pass all three tests, you are entitled to the dependency exemption. Your parent is not required to live with you.

If you are right on the borderline of paying over half your parent’s support, it may even make sense for you to pay some extra expenses before year-end to lock in the $4,050 dependency exemption for your 2016 return.

If you and your siblings together pay over half your parent’s support (without any one of you individually paying over half), you can agree to file a special tax form that designates one of you to claim the $4,050 dependency exemption for your parent for the 2016 tax year — as long as the designated person pays over 10 percent of your parent’s support for the year. The key is that you and the others providing the support agree in writing that one individual gets the dependency exemption. For more details on this frequently overlooked multiple-support rule, consult with your tax adviser.

3. Use Head of Household Filing Status

Last but not least, if you are unmarried and can claim a dependency exemption for your parent, you may qualify to use head of household filing status, which generally saves more tax than filing as a single taxpayer. This is mainly because the tax brackets are more favorable and the standard deduction is bigger.

To be eligible to file as a head of household, you must pay over half the cost of maintaining your parent’s home in addition to being able to claim a dependency exemption. However, your parent is not required to actually live with you. For example, your parent can live in a retirement community. (This is an exception to the general rule. Dependents other than a parent must live with a taxpayer in order to qualify for head of household filing status.)

You deserve applause for taking care of an aging parent. You may also be entitled to some financial assistance from Uncle Sam in the form of tax breaks.

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