Elizabeth O'Brien for Marketwatch/Wall St. Journal writes: Caring for an older relative? You might qualify for certain benefits at tax time. If you employ a paid caregiver, you may have certain responsibilities as well. Either way, now’s the time to start grappling with the ways the tax code could affect you.
There are plenty of folks in these positions. In a Pew Research survey last year, 36% of U.S. adults said they provided unpaid care for an adult relative or friend in the past year, up from 27% in 2010. And the number of paid personal care aides is expected to soar 49% between 2012 and 2022, to 1.8 million, growing at a much higher rate than the average profession, according to the Bureau of Labor Statistics.
While it can take time to determine whether you’re eligible for caregiver’s tax benefits, your efforts could yield thousands of dollars in tax savings. At the same time, running afoul of certain tax rules could potentially cost you the same or even more in penalties. Below are some factors to consider when preparing to file federal income taxes for 2013.
Determining dependent status
A good first step is to figure out whether you can claim your loved one as a dependent. For every qualified dependent on your tax return, you reduce your 2013 taxable income by $3,900 and other benefits flow from that determination as well, including whether you’ll be able to deduct medical expenses.
An older person must meet the following criteria to qualify as a dependent:
Income . The person must have no more than $3,900 in gross income a year. This includes any income from pensions, taxable investments and the taxable portion of Social Security payments, if applicable. (Generally, only people with substantial other income must pay federal income taxes on Social Security benefits).
Support . You must provide more than half of the person’s financial support. This includes fair market value for space in your home if, say, your mom lives with you and doesn’t pay rent.
Relationship . Parents meet the relationship requirement, as do stepparents and mothers and fathers-in-law, siblings and other close relatives. These relatives do not have to live with you to be claimed as a dependent. For example, if your dad is in a care facility and meets all the other criteria, then he could still qualify as a dependent.
A note for siblings sharing the care of a parent: Only one sibling can claim their parent as a dependent in any given year. The Internal Revenue Service defines “multiple support” as no one person providing more than 50% of the financial support, and everyone providing over 10%. (The multiple siblings together have to provide more than 50% of the parent’s support.) In this scenario, siblings often rotate annually who claims the parent, said Lawrence H. Carlton, a certified public accountant in Bedford, Mass.
A note for single caregivers: If you can’t claim your parent as a dependent based on the above criteria, you may still be able to claim head of household status based on your caregiving relationship, Carlton said. This filing status is more beneficial than the single filing status, in that it allows higher income thresholds for the lower tax brackets.
Deducting medical expenses
If you can claim your mother or father as a dependent, then you can write off their eligible medical expenses on your tax return. If they have income exceeding $3,900, but you still provide more than half of their financial support, you can also deduct their medical expenses.
Deducting medical expenses can yield big savings. To claim the deduction, you have to itemize your deductions on your tax return, rather than take the standard deduction. Itemizers ages 65 and over can deduct the amount by which total medical expenses exceed 7.5% of adjusted gross income, while those 64 and under can deduct the amount by which those expenses exceed 10% of income. If you’re 64 or under, claim your parent as your dependent and plan to deduct both your and your parent’s eligible medical expenses, the 10% threshold applies, Carlton said.
Eligible expenses include Medicare Part B and D premiums, as well as coinsurance or copayments you owe the doctor. Many dental expenses can also be deducted, including dentures, a costly item that Medicare doesn’t cover. The same goes for hearing aids. You can also deduct the cost of household modifications that enable an older person to live with you, such as ramps outside the house and grab bars in the shower. [snip...the article continues at Marketwatch.com / Wall St Journal, click here to continue reading].
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