A few of years ago, my mother involved me in her senior years planning. A number of not-so-comfortable topics arose, one of which stood the chance of directly impacting me, my wife, and my children. Should my mom come live with me, what could be some of the unforeseen cost I may incur, and could there be tax effects? Really, is this a factor I had to be aware of?
Last week, I dropped by at a client's home to see how she was doing. I was let in the house by her son and daughter-in-law, who were visiting from Denver. Immediately upon being seated and offer something to drink, I had the feeling I had just walked into one of those uncomfortable family meetings that did not involve me.
Before I could find a reason to politely remove myself, I was asked, "Do you know anything about this?" I suddenly pictured that my mom must sitting at her home smiling sardonically and wondering why. With an overwhelming feeling of the "I told you so," I responded, "Yeah, a little bit."
Did you know that you may be eligible to declare your parent or other elderly relative as a dependent for a tax deduction, or to deduct their medical expenses from your taxes.
As you prepare your 2012 return, here are a few tips for determining your possible tax benefits. Remember, these tips are guidelines only. It is strongly recommended that you consult with a tax adviser before submitting your return.
In order to declare your elderly relative as your dependent, you both must meet certain criteria:
• You must be related to the person. If you are caring for your parent, grandparent, step-parent or parent-in-law, you may be eligible for a caregiver tax exemption.
• The person you are caring for must not have received more than $3,700 in income in 2012. This figure does not include Social Security payments.
• You must have provided more than 50 percent of the person's living expenses, including housing, food, dental care, transportation and other similar expenses in 2012. The person you are declaring as your dependent does not need to live in your home - which means they may be living in their own home, or a care facility, but you must be paying for more than 50 percent of their expenses.
If your situation meets all of the above criteria, you may be eligible to claim your relative as a dependent on your 1040 form, which can equate to a reduction of your taxable income by $3,700 for the year.
If your family is dividing the duties of caring for an individual - for example, more than one sibling is contributing to the care of a parent - you may still be eligible for the tax exemption. However, only one person can declare someone as a dependent in a single year. Each sibling must provide at least 10 percent of the parent's care, and combined the siblings must be providing for more than 50 percent of the parent's care. Many families choose to take turns each year as to who will receive the tax exemption for caring for a relative. In this case, the person who is declaring the parent as a dependent must fill out a "multiple support declaration" and submit it with their tax return. All of the other siblings must sign the form to claim that they will not take the exemption on their own tax returns. You can find the form on the IRS site.
If you are not able to declare your relative as a dependent because they earned more than $3,700 last year, but you still provide more than 50 percent of their expenses, you may still be able to receive tax benefits by deducting their medical expenses on your tax return. According to IRS Form 2120, the IRS allows caregivers to deduct costs incurred from a parent's health care, such as hospitalization, prescription drugs, dental care and long-term services. The deduction is limited to medical expenses that are in excess of 7.5 percent of the caregiver's adjusted gross income.
Are you considering having you parent(s) move in to your home? The IRS says you can claim the "fair rental value" of the home, including a reasonable allowance for the use of furniture, appliances and utilities. This is the amount you could reasonably expect to receive from a stranger for the same kind of lodging. You can find examples in the IRS Publication 501, which explains how to calculate these amounts.
In addition to these federal tax benefits, some states also offer tax incentives for caregivers. The AARP Foundation Tax-Aide program provides free tax preparation and counseling information. For more information, call 888-OUR-AARP or visit www.aarp.org/taxaide.
When you are unsure about what deductions you are eligible for, it is always best to consult a qualified financial professional for planning and preparing your taxes.
Judson Haims is the owner of Visiting Angels Home Care in Eagle County. For more information, go to www.visitingangels.com/comtns or call 970-328-5526.