Are your parents a tax deduction?

You may have already started putting the information together for your taxes. But there’s something important you need to know. If you are providing substantial financial assistance to your parents you should be aware that you may qualify for significant tax deductions!

The key to Internal Revenue Service assistance in caring for an elderly relative is whether you can claim the person as a dependent. If you and your parent meet IRS requirements, you’ll be able to claim an added personal exemption on your income tax return. This filing season, each exemption allows you to reduce your taxable income by $3,700

Then there are possible deductions and credits. If you pay medical expenses for a dependent parent, you may be able to deduct some of those costs. Hire a caregiver to help you out and a credit could cut your tax bill a bit more.

A dependent parent cannot make more than the exemption amount. This is $3,700 this year. The income barrier represents taxable income. Social Security normally is excludible, but if they have other income, which in many cases means interest and dividends, some is taxable. If your parent meets the income requirement than you must determine the level of support you provide.

To be deemed a dependent for tax purposes, your parent must get more than half of his or her support from you.

If your parent lives in your home, to reach the 50-percent-plus threshold you can take into account the fair-market room rental, food, medicine and other little support items.

But your parent doesn’t have to live with you. When a parent is able to remain in his or her own house, in an assisted living facility or a nursing home, costs you pay for parental support at those locations count toward meeting the IRS requirement.

Once your parent meets the IRS dependency tests, you can use any medical expenses you pay for mom or dad toward your itemized deductions. Since medical costs must exceed 7.5 percent of your adjusted gross income before you can claim them, a parent’s added expenses could help you meet the requirement.

When adding up those parental medical costs, don’t forget premiums for supplementary Medicare coverage or long-term care insurance. Once your parent is your dependent, some of these payments that you make can be counted toward your deductible medical expenses.

And if your dependent parent lives with you and requires continual care, you may be eligible for another tax break. What you spend for this attention generally won’t count toward the medical deduction. But if it’s necessary so that you can go to work, you can claim the dependent care credit which could be as much as $3000. The amount is based on a formula considering your income level. But it’s a credit not a deduction. This means its a dollar for dollar reduction in taxes.

If you share the cost of caring for your parents with your siblings you should file Form 2120, Multiple Support Declaration with your tax return. This form indicates that while several siblings contributed to your parent’s support, the others waive any tax-exemption claim.

You also need to get signed statements from your siblings acknowledging that they waived their tax claims. You don’t have to send these documents with your 1040, but keep them in your records in case the IRS ever questions your exemption or medical deduction claims.

If this arrangement sounds unfair to your siblings you should inform them that the tax benefit can be rotated among you. One child can claim the deduction one year and another the next. But be careful that you pay the expenses in the year you claim the deduction.