February 26, 2008 12:00 am

Parents as Dependents

Call it role reversal, but a growing number of children are caring for their parents. According to a 2007 USA TODAY/ABC News/Gallup poll of baby boomers, 41% who had a living parent were providing financial or personal care (or both) for them, and 8% had parents who had moved in with them. Of those who were not yet caring for an aging parent, 37% anticipated having to do so in the future.

The bad news: Family-provided care can be financially and emotionally draining. The good news: Caregivers may be entitled to various tax breaks.

Claiming a dependency exemption

Adult children who support a parent, or both parents, may be entitled to a dependency exemption. This deduction is fixed at $3,500 per dependent in 2008.

To claim a dependency exemption for a parent, you must meet all of the following conditions:

  • You provide more than half the parent’s support.
  • Your parent’s gross income does not exceed the amount of the dependency exemption for the year ($3,500 for 2008). Gross income includes Social Security benefits only if they’re taxable to your parent. Gross income does not include gifts, life insurance proceeds, tax-exempt bond interest, and other tax-free amounts.
  • Your parent does not file a joint tax return with his/her spouse (unless the couple’s income is below the level for filing a return and they do so only to claim a refund of taxes paid).
  • Your parent is a U.S. citizen or resident, or a resident of Canada or Mexico.

Multiple support agreement. If you, along with others (such as your siblings), contribute as a group more than 50% of your parent’s support, you can decide among you who will claim the exemption-only one person can (you do not divide or apportion the exemption among those giving support).

To claim the exemption, you must have provided more than 10% of your parent’s total support.

It’s usually advisable for supporters to agree that the person who can benefit the most will be the one who claims the exemption.

For example, say three sisters-Amy, Beth, and Carol-support their mother. Amy provides 5%, Beth 40%, and Carol 25% (so that together they provide 70% of the mother’s support). Amy’s support is counted in figuring whether the group’s contributions exceed 50%, but she can’t claim the exemption herself; she did not provide more than the required 10%. Beth and Carol each qualify. If Beth is in the 28% tax bracket and Carol is in the 15% tax bracket, it makes more tax sense for Beth to claim the exemption. In 2008, for example, the $3,500 dependency exemption would give a tax savings to Beth of $980, but only $525 to Carol.

The decision about which supporter claims the exemption can be changed from year to year as contributions and supporters’ tax situations change.

Important: Each supporter who gave more than 10% must sign Form 2120, Multiple Support Agreement. The person claiming the exemption must attach the form (or forms if there are multiple eligible contributors) to his or her income tax return.

Head-of-household status

If you aren’t married and your parent is your dependent, you may be eligible to use head-of-household filing status. This allows you to claim a larger standard deduction amount than other singles if you don’t itemize your personal deductions. It also lets you use tax brackets more favorable than those for other singles.

To qualify, you must be unmarried at the end of the year (or treated as unmarried under tax rules) and you must pay more than half the cost for the parent’s home. While dependents other than a parent must live in your home, a parent can be a dependent while living in his or her own home, or even in a nursing home.

What’s counted in determining whether you paid more than half the costs of maintaining the parent’s home? Include:

  • Rent or property taxes and mortgage interest
  • Utilities
  • Property insurance
  • Repairs
  • Domestic help
  • Food eaten on the premises

Do not include:

  • Rental value provided to your parent in your home
  • Clothing
  • Medical expenses
  • Vacation costs
  • Life insurance
  • Transportation costs
  • Value of your work to look after your parent or clean or repair your parent’s room or residence.

Deducting parent’s medical costs

If you pay your parent’s medical expenses, you may be able to treat them as your own in figuring your itemized medical deduction. You qualify to do this if you pay more than half your parent’s support-regardless of whether your parent’s gross income is below the exemption amount.

For example, say you are providing 60% of you parent’s support, but your parent’s gross income for the year is $10,000 (more than the $3,500 exemption amount in 2008). You do not qualify to claim your parent as your dependent; you do qualify to treat the medical expenses you pay for your parent as your own. Doing this can help you get over the 7.5%-of-adjusted-gross-income floor for deducting medical expenses on your return.

Dependent care credit

If your parent resides with you, is your dependent, and is physically or mentally incapable of self-care, you can claim a dependent care credit for costs you pay for your parent’s care so you can work. The amount of this tax credit varies according to your income and the expenses you pay. Up to $3,000 of dependent care costs for your parent can be taken into account in figuring the credit. If your adjusted gross income is more than $43,000, your top credit would be limited to $600 for one parent.

Note: Legislation called the Middle Class Opportunity Tax Act, introduced in 2007, would have extended the credit to children whose parent is their dependent but does not reside with them. Whether this measure will be enacted in 2008 remains to be seen.

Tax Glossary

Revocable trust

A trust that may be changed or terminated by its creator or another person. Such trusts do not provide an income tax savings to the creator.

More terms