Tax Planning when You Take Care of Your Parents

As our parents age, many of us find ourselves taking on the role of caretaker. While it can be a rewarding experience to care for our loved ones, it can also be financially challenging. Fortunately, there are ways that caretakers can receive financial assistance, such as claiming their parents as dependents. However, there are specific rules for claiming dependents and certain income restrictions that need to be considered.

To claim a dependent, the person being claimed must meet certain criteria. According to the Internal Revenue Service (IRS), a dependent must be a qualifying child or a qualifying relative. To be considered a qualifying child, the dependent must be under the age of 19 or a full-time student under the age of 24, must live with the caretaker for more than half the year, and cannot provide more than half of their own support. A qualifying relative, on the other hand, can be any age but must meet the support test, which means the caretaker must provide more than half of the dependent's support. Additionally, the dependent must not have a gross income that exceeds the personal exemption amount, which for the 2021 tax year is $4,300.

While parents can be claimed as qualifying relatives, there are income limitations to consider. If the parent is receiving Social Security payments or other fixed income payments, such as a pension, their income may disqualify them from being claimed as a dependent. For the 2021 tax year, a parent's gross income cannot exceed $4,300 if they are being claimed as a qualifying relative. Additionally, the parent must not file a joint tax return with their spouse if they are married.

Even if a parent cannot be claimed as a dependent, there are still potential tax deductions available for caretakers. One deduction is for medical expenses. If the caretaker is paying for their parent's medical expenses, they may be able to deduct those expenses on their tax return. To qualify, the expenses must exceed 7.5% of the caretaker's adjusted gross income. Medical expenses can include things like doctor visits, prescription medications, and long-term care services.

For example, let's say Jane is caring for her mother, who has an income of $10,000 from Social Security and $2,000 from a part-time job. Even though Jane is providing more than half of her mother's support, she cannot claim her as a dependent because her mother's income exceeds the personal exemption amount. However, Jane can still potentially claim a deduction for her mother's medical expenses if those expenses exceed 7.5% of Jane's adjusted gross income.

It is important to note that tax laws are complex and subject to change. If you are a caretaker and are unsure about your tax situation, it is recommended that you consult with a tax professional or refer to the IRS website for further guidance.