Tax Breaks for the Sandwich Generation

Compliments of Our Law Firm,
By: The American Academy of Estate Planning Attorneys

As our population ages, many of us find ourselves in a role we never quite anticipated: we’re serving as caregivers for our elderly parents while still raising children of our own. The emotional burden is one that most of us accept with grace and love. The financial challenges, on the other hand, can be a little harder to overcome. That’s why it’s important to know when you can claim your aging or ill parent as a dependent for income tax purposes.

50 Percent: The Magic Number

If, during the tax year in question, you provided more than one-half of your parent’s support  for food, shelter, medical care, and clothing, then your mom or dad is your dependent in the eyes of the IRS. Keep in mind that expenses covered by insurance, Medi-Cal, and Medicare benefits do not count.

Here’s an example:

Your father lives in your home. You pay the mortgage and utilities and provide all of his food and transportation. If you added it up, the value of this would come to about $800 per month, or $9,600 per year. He gets Medicare benefits of $4,000, which aren’t  enough to cover his annual medical expenses of about $7,000. He also receives $600 in Social Security benefits each month for an annual total of $7,200. He uses his Social Security to cover his remaining medical bills, pay for clothing, buy gifts for the grandkids, and take care of other miscellaneous expenses. All told, your dad’s expenses add up to about $16,600 per year, of which you cover approximately 58%. This means that your father qualifies as your dependent.

Exception to the 50 Percent Rule

If you do not provide more than 50% of your parent’s support, all is not lost. You might still be able to claim your mom or dad as your dependent if all of the following are true:

• You provide at least 10% of your parent’s support.
• You and others besides your parent provide more than 50% of your parent’s support.
• No one person provides more than 50% of your parent’s support.
• Every other person who contributed more than 10% to your parent’s support waives the right to claim your parent as a dependent by signing Form 2120.
• You attach each applicable Form 2120 to your tax return.

The Benefits of Claiming Your Parent as a Dependent

The ability to claim your parent as a dependent opens up a number of tax breaks. Perhaps the most valuable is the opportunity to deduct your parent’s medical expenses.

Provided your mom or dad qualified as your dependent on the date the services were performed or the date they were paid for, you can treat any medical bills incurred by your parent the same as medical bills incurred by you, your spouse, or your children. So, assuming you itemize your deductions and your family’s total medical expenses exceed 7.5% of your income, you can claim a deduction for your family’s medical bills – including those incurred by your mom or dad to the extent those expenses exceed 7.5% of adjusted gross income.

Even if you can’t take advantage of the medical deduction, you may be able to claim a dependent care deduction if both of the following are true:

1. Your parent lives with you.
2. Your parent cannot care for him or herself.

Last but not least, if your mom or dad does not claim a personal exemption for him- or herself, you can claim your parent’s personal exemption.

While all of these tax breaks help to ease the financial burden that can accompany caring for your aging parent, the best way to lighten your financial load is to plan ahead. Long-term care insurance, Medi-Cal planning, and other estate planning tools can make your parents’ twilight years easier for your whole family.

An experienced estate planning attorney can help you and your parents plan ahead for the financial concerns that aging brings, so that you can focus on enjoying every moment you have together.