Many people may not be aware of a powerful tax benefit that exists within
their families. Those who financially support an older relative may be able to
claim them as dependents.
Our society is changing. Over the past ten years, older parents have begun moving
in with their adult children at increasing rates. In 2000, 4.1 percent or 2.3 million
aging parents were living with family. By 2007, the number had jumped to 6.5 percent or 3.6 million. Today, multigenerational households are burgeoning (AsYouAge 2013), and many who support these aging Americans are missing an important tax benefit.
It is called the Personal Exemption. The value varies from year to year. In 2013 the personal exemption was worth $3,900, and in 2014 it increases to $3,950. In many instances, those who support older adults financially are able to claim them as dependents or seniors can claim themselves. Taking advantage of this powerful tax benefit requires knowledge of the support received by the older adult and how much seniors support themselves. In this article, individuals will discover who can claim a senior as a dependent and under what circumstances.
For older adults who claim themselves as dependents, the value can be more than the personal exemption. In addition to claiming the personal exemption, those age sixty-five and older can claim an added $1,200, and an additional $1,200 if they are blind.
Blindness is the only physical impairment that allows the additional personal exemption amount. For married couples, this is a double real benefit. For example, Reg and Chickie are both over age sixty-five and Chickie is blind. Their personal exemption
for 2014 would be:
Only taxpayers who claim their own personal exemption—meaning they are not claimed as a dependent by someone else—can get the additional age and blindness exemptions.
But if you cared for an older parent, your parent may qualify as your dependent, resulting in additional tax benefits for you.
The first thing that often comes to mind when considering dependents is the parent/child relationship. Normally, parents claim their children as dependents until they become adults. It also works the other way around. If you cared for an older parent, your parent
may qualify as your dependent, resulting in additional tax benefits for you. Once you determine that both of you meet IRS criteria, you can claim your parent as a dependent on your tax return and claim their Personal Exemption on your tax return.
The First Test is the Income Limitation
A parent must first meet income requirements set by the Internal Revenue Service to be claimed as a dependent. To qualify as a dependent, the parent must not have earned or received more (income) than the personal exemption amount for the tax year. Again,
this amount is determined by the IRS and may change from year to year. The current exemption amounts can be found in IRS Publication 501. For 2014, the personal
exemption amount is $3,950. Generally, Social Security is not counted as income, but there are exceptions. If a parent has other income from interest or dividends, a portion of the Social Security may also be taxable.
Example 1: My mother, Minnie. Minnie only has Social Security income and draws $18,000. Because this amount is under the threshold for taxing , Minnie does not need to file a tax return. Her taxable income is below the personal exemption amount of $3,950 for 2014, and she could be claimed on someone else’s tax return.
Example 2: My aunt, Millie. Aunt Millie came to live with me in January 2014 and I am her total support. Her health prohibited her from living alone However, she did not want to sell her home, always wishing and hoping she could return to it one day. She rented her home for $350 a month but the insurance, repairs, and yard maintenance exceed the income. Because her gross income is $4,200 ($350 x 12 months), I cannot claim Aunt Millie as a dependent.
Her $4,200 of gross income from the rental of her former home exceeds the personal exemption amount of $3,950 for 2014.
But if you cared for an older parent, your parent may qualify as your dependent, resulting in additional tax benefits for you.
The first thing that often comes to mind when considering dependents is the parent/child relationship. Normally, parents claim their children as dependents until they become adults. It also works the other way around. If you cared for an older parent, your parent
may qualify as your dependent, resulting in additional tax benefits for you. Once you determine that both of you meet IRS criteria, you can claim your parent as a dependent on your tax return and claim their Personal Exemption on your tax return.
The First Test is the Income Limitation
A parent must first meet income requirements set by the Internal Revenue Service to be claimed as a dependent. To qualify as a dependent, the parent must not have earned or received more (income) than the personal exemption amount for the tax year. Again,
this amount is determined by the IRS and may change from year to year. The current exemption amounts can be found in IRS Publication 501. For 2014, the personal
exemption amount is $3,950. Generally, Social Security is not counted as income, but there are exceptions. If a parent has other income from interest or dividends, a portion of the Social Security may also be taxable.
Example 1: My mother, Minnie. Minnie only has Social Security income and draws $18,000. Because this amount is under the threshold for taxing , Minnie does not need to file a tax return. Her taxable income is below the personal exemption amount of $3,950 for 2014, and she could be claimed on someone else’s tax return.
Example 2: My aunt, Millie. Aunt Millie came to live with me in January 2014 and I am her total support. Her health prohibited her from living alone However, she did not want to sell her home, always wishing and hoping she could return to it one day. She rented her home for $350 a month but the insurance, repairs, and yard maintenance exceed the income. Because her gross income is $4,200 ($350 x 12 months), I cannot claim Aunt Millie as a dependent.
Her $4,200 of gross income from the rental of her former home exceeds the personal exemption amount of $3,950 for 2014.
Example 3: Gale and her grandchildren. Gale has custody of her two grandchildren, Julie and Brian. The assets of their deceased parents were placed in a simple trust where Julie and Brian are the beneficiaries. The terms of the simple trust dictate that all income
made by the trust assets is distributed to the beneficiaries.But if the income distributed by the trust exceeds $3,950 for Julie and/or Brian, Gale cannot claim them as dependents.
If Gale adopted Julie and Brian, the income would not be a factor and she could claim them as “qualifying children,” unless their income from the trust supported them greater than 50 percent.
The Second Test is the Support Requirement
Adult children must have provided more than half of their parent’s’ support during the tax year in order to claim them as dependents. When determining the monetary value of the amount of support they provide, they need to consider several factors.
First, calculate the fair market value of the room the parents occupy. That is, how much rent could be charged for the space?
Next, consider the cost of food provided. Do not forget to include utilities, medical bills, and general living expenses, as well as the cost of transportation for the parents. This includes transportation to doctor appointments, attendance at church or synagogue, as
well as for recreation. If structural improvements were made to a home to accommodate a disabled relative, such as a wheel-chair ramp or modifications to bathroom facilities among others, the costs may qualify as medical expenses, to the extent they do not improve the value of the home. Compare the value of support you provide with any income, including Social Security, that your parent receives to determine whether you meet the support requirement. The amount of support provided must exceed the parents’ income by at least one dollar and therefore be greater than 50 percent.
Relatives Who Do Not Have to Live with You All Year
The residency test. In most instances, the person claimed as a dependent must live in your home all year. A person related to you in any of the following ways does not have to live with you all year as a member of your household to meet this test.
The residency test. In most instances, the person claimed as a dependent must live in your home all year. A person related to you in any of the following ways does not have to live with you all year as a member of your household to meet this test.
- A child, stepchild, foster child, or a descendant of any of them. A grandchild would be an example.
- A brother, sister, half brother, half sister, stepbrother, or stepsister.
- A father, mother, grandparent, or other direct ancestor, but not a foster parent.
- A stepfather or stepmother.
- A son or daughter of your brother or sister.
- A son or daughter of your half brother or half sister.
- A brother or sister of your father or mother.
- Your son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
It should be noted that none of these relationships that are established by marriage are ended by death or divorce.
For example, Frank and Marie were the caregivers and supporters of Marie’s father, John. Marie died in 2013 but Frank continues to support and care for her father. Although John was Marie’s father, the relationship between Frank and John did not end with her death. If qualified, Frank can continue to claim John as a personal exemption on his tax return for 2014.
What about temporary absences? A person is considered to live with you as a member of your household during periods of time when they are temporarily absent due to special circumstances such as:
If the person is placed in a nursing home or care facility for an indefinite period of time to receive constant medical care, the absence may be considered temporary.
Death or Birth
A person who died during the year, but lived with you as a member of your household until death, will meet this test. A person doesn't need to be alive the entire year to be claimed as a full-year dependent. If a dependent died during the year and you otherwise
qualify to claim the personal exemption for the dependent, you can still claim the exemption.
Example: My mother, Minnie, died on January 15, 2014. She met the tests to be my qualifying relative. The other tests to claim an exemption for a dependent were also met, and I am able to claim the personal exemption for her on my tax return. The personal exemption is not prorated, but the full $3,950 is allowed although she did not live all year.
Head of Household
A taxpayer using the Head of Household filing status is entitled to use the head of household tax rates, which feature wider tax brackets. Also, the taxpayer is entitled to a larger standard deduction ($9,100 for tax year 2014) than taxpayers using Single or Married Filing Separately ($6,200 for tax year 2014). Head of Household is a filing status for individual United States taxpayers. To use the head of household filing status, a taxpayer must:
Deducting Medical Expenses
If you paid for your parent’s medical care, the expenses may be deductible. They can be claimed as itemized deductions on Schedule A. Itemized deductions are beneficial when they exceed the amount of the standard allowable deduction. Total medical expenses,
including the cost of prescription drugs, equipment, hospital care, and doctor’s visits, must exceed 10 percent of adjusted gross income to be claimed. The IRS understands the heavy burden that medical expenses sometimes create, and has made an exception
for this deduction.
You can deduct your parent’s medical expenses even if they do not meet the income requirement to be claimed as your dependent, as long as you provide more that half of their support.
Example: My mother, Minnie. Minnie makes too much money for me to claim her as a dependent. But if I support her greater than 50 percent, I can claim her medical expenses I paid on my Schedule A, Itemized Deductions on my tax return.
People sixty-five and older have an exclusion of 7.5 percent of income from the amount they can claim as medical. Taxpayers under age sixty-five have a 10 percent of income exclusion. This provision of the Affordable Health Care Act is in effect until 2017 when
all taxpayers fall under the 10 percent exclusion. However, if I claim Minnie’s medical expenses on my tax return, Schedule A, Medical, I am still subject to the 10 percent of adjusted gross income exclusion unless I, too, am sixty-five or older.
Dependent Care Credit. The child and dependent care credit is a non-refundable tax credit. It can be claimed by taxpayers who pay for the care of a qualifying individual and meet certain other requirements. If parents are physically or mentally unable to care for
themselves, they are qualifying individuals.
In order to qualify for the credit, you must meet certain requirements. You need to have earned income and work-related expenses to qualify. This means that the care must have been provided while you were either working or looking for work. In addition, you must be able to properly identify the care provider. This includes giving the provider’s name, address, and identifying number (either Social Security number or employer identification number to the IRS on your tax return). If you are married but file a separate return, you may not claim this credit.
The cost of home care, which enables the taxpayer to work elsewhere, can be applied towards a medical expense deduction or the Dependent Care Credit, but not to both. Usually, it is advantageous to apply these expenses up to the maximum amount ($3,000) toward a dependent care credit and the remainder as medical expense deductions. However, this may not always be the case. It is advisable to seek a tax professional to
determine which is more advantageous.
In 2013, twenty-eight states have some version of the Federal Child and Dependent Care Credit. These states allow tax filers to deduct a percentage of their federal tax credit from their state tax returns. If the dependent care tax credit in your state is 50 percent of the federal amount and your federal credit is $1,050, you can also deduct $525 for your state taxes. Many states apply a range of percentages based on the income of the person claiming the older adult as a dependent. Some states limit the credit for higher-income taxpayers, allowing only 35 percent of their federal credit. Your state’s website will be a good source of information about this potential credit.
Claiming a Dependency Exemption under a Multiple Support Agreement
Multiple Support Agreements are a little-known boon to taxpayers with older dependents. Many seniors who may qualify as dependents go unclaimed on federal income tax returns each and every year. Although there are no statistics on unclaimed individuals (neither the IRS or the U. S. Census Bureau have these numbers), many who financially support seniors may fail to claim their personal exemptions because they do not know about the Multiple Support Agreeement.
Even if you do not provide more than half the support of another person, you may still qualify for a dependency exemption ($3,950 in 2014) if you have a multiple support agreement. This agreement applies if you contribute more than 10 percent of the person’s support and, together with others, contribute more than 50 percent of the person’s support. Then each of the other supporters who contribute more than 10 percent
must agree among themselves who will claim the exemption (it cannot be prorated among the supporters). Only one person can claim the exemption.
Example: You and your three sisters support your mother. You contribute 40 percent and the other sisters each contribute 15 percent, and your mother contributes 15 percent toward her own support.
Since you and your sisters contribute more than half of your mother’s support (40 + 15 + 15 + 15 = 85 percent), a multiple support agreement can be used for one of you to claim your mother as a dependent and receive her personal exemption.
Any one of you may claim your mother as a dependent, but only one of you each year, and this can be done on alternating years. IRS Form 2120 Multiple Support Agreement must be signed by all who contribute greater than 10 percent to the parent’s support. Contributing more than 10 percent is a requirement to claim the dependent.
A worksheet for determining support in order to claim an older adult as a dependent and receive a personal exemption can be found at www.irs.gov/pub/irs-pdf/p501.pdf. Once completed, the worksheet will determine who can claim the older adult. It should be
retained, with documentation to support the schedule, with the tax records of the individual making the claim. Taxpayers in the top tax brackets will experience the phase-out, a provision of the tax code that reduces itemized deductions and personal exemptions, sometimes to zero, simply because of the amount of their income.
A knowledgeable and trustworthy tax professional can be the most valuable asset in determining who can and should claim an older adult as a dependent. Financial advisors should be aware of these tax benefits and refer their clients to tax professionals
for assistance. •CSA
Beanna Whitlock is an Enrolled Agent in private practice as Whitlock Tax Service, LLC, in Reno, Nevada. She is an adjunct professor at Auburn University, and is a faculty member at the National Center for Professional Education. She has been honored by Accounting Today as one of the 100 Most Influential in Accounting for an unprecedented seven years. Contact her at Beanna@ whitlocktax.com, or see www.Whitlocktax.com.
Supporting an Older Relative: A Surprising Tax Benefit was recently published in the Summer 2014 edition of the CSA Journal.
For example, Frank and Marie were the caregivers and supporters of Marie’s father, John. Marie died in 2013 but Frank continues to support and care for her father. Although John was Marie’s father, the relationship between Frank and John did not end with her death. If qualified, Frank can continue to claim John as a personal exemption on his tax return for 2014.
What about temporary absences? A person is considered to live with you as a member of your household during periods of time when they are temporarily absent due to special circumstances such as:
- Illness
- Education
- Business
- Vacation
- Military service
If the person is placed in a nursing home or care facility for an indefinite period of time to receive constant medical care, the absence may be considered temporary.
Death or Birth
A person who died during the year, but lived with you as a member of your household until death, will meet this test. A person doesn't need to be alive the entire year to be claimed as a full-year dependent. If a dependent died during the year and you otherwise
qualify to claim the personal exemption for the dependent, you can still claim the exemption.
Example: My mother, Minnie, died on January 15, 2014. She met the tests to be my qualifying relative. The other tests to claim an exemption for a dependent were also met, and I am able to claim the personal exemption for her on my tax return. The personal exemption is not prorated, but the full $3,950 is allowed although she did not live all year.
Head of Household
A taxpayer using the Head of Household filing status is entitled to use the head of household tax rates, which feature wider tax brackets. Also, the taxpayer is entitled to a larger standard deduction ($9,100 for tax year 2014) than taxpayers using Single or Married Filing Separately ($6,200 for tax year 2014). Head of Household is a filing status for individual United States taxpayers. To use the head of household filing status, a taxpayer must:
- be unmarried or considered unmarried as of the last day of the tax year;
- have paid more than half the cost of keeping up a home for the tax year (either one’s own home or the home of a qualifying parent);
- in most cases have a qualifying person who lived with the head of household in the home for more than half of the tax year except if the qualifying person is a dependent parent.
Deducting Medical Expenses
If you paid for your parent’s medical care, the expenses may be deductible. They can be claimed as itemized deductions on Schedule A. Itemized deductions are beneficial when they exceed the amount of the standard allowable deduction. Total medical expenses,
including the cost of prescription drugs, equipment, hospital care, and doctor’s visits, must exceed 10 percent of adjusted gross income to be claimed. The IRS understands the heavy burden that medical expenses sometimes create, and has made an exception
for this deduction.
You can deduct your parent’s medical expenses even if they do not meet the income requirement to be claimed as your dependent, as long as you provide more that half of their support.
Example: My mother, Minnie. Minnie makes too much money for me to claim her as a dependent. But if I support her greater than 50 percent, I can claim her medical expenses I paid on my Schedule A, Itemized Deductions on my tax return.
People sixty-five and older have an exclusion of 7.5 percent of income from the amount they can claim as medical. Taxpayers under age sixty-five have a 10 percent of income exclusion. This provision of the Affordable Health Care Act is in effect until 2017 when
all taxpayers fall under the 10 percent exclusion. However, if I claim Minnie’s medical expenses on my tax return, Schedule A, Medical, I am still subject to the 10 percent of adjusted gross income exclusion unless I, too, am sixty-five or older.
Dependent Care Credit. The child and dependent care credit is a non-refundable tax credit. It can be claimed by taxpayers who pay for the care of a qualifying individual and meet certain other requirements. If parents are physically or mentally unable to care for
themselves, they are qualifying individuals.
In order to qualify for the credit, you must meet certain requirements. You need to have earned income and work-related expenses to qualify. This means that the care must have been provided while you were either working or looking for work. In addition, you must be able to properly identify the care provider. This includes giving the provider’s name, address, and identifying number (either Social Security number or employer identification number to the IRS on your tax return). If you are married but file a separate return, you may not claim this credit.
The cost of home care, which enables the taxpayer to work elsewhere, can be applied towards a medical expense deduction or the Dependent Care Credit, but not to both. Usually, it is advantageous to apply these expenses up to the maximum amount ($3,000) toward a dependent care credit and the remainder as medical expense deductions. However, this may not always be the case. It is advisable to seek a tax professional to
determine which is more advantageous.
In 2013, twenty-eight states have some version of the Federal Child and Dependent Care Credit. These states allow tax filers to deduct a percentage of their federal tax credit from their state tax returns. If the dependent care tax credit in your state is 50 percent of the federal amount and your federal credit is $1,050, you can also deduct $525 for your state taxes. Many states apply a range of percentages based on the income of the person claiming the older adult as a dependent. Some states limit the credit for higher-income taxpayers, allowing only 35 percent of their federal credit. Your state’s website will be a good source of information about this potential credit.
Claiming a Dependency Exemption under a Multiple Support Agreement
Multiple Support Agreements are a little-known boon to taxpayers with older dependents. Many seniors who may qualify as dependents go unclaimed on federal income tax returns each and every year. Although there are no statistics on unclaimed individuals (neither the IRS or the U. S. Census Bureau have these numbers), many who financially support seniors may fail to claim their personal exemptions because they do not know about the Multiple Support Agreeement.
Even if you do not provide more than half the support of another person, you may still qualify for a dependency exemption ($3,950 in 2014) if you have a multiple support agreement. This agreement applies if you contribute more than 10 percent of the person’s support and, together with others, contribute more than 50 percent of the person’s support. Then each of the other supporters who contribute more than 10 percent
must agree among themselves who will claim the exemption (it cannot be prorated among the supporters). Only one person can claim the exemption.
Example: You and your three sisters support your mother. You contribute 40 percent and the other sisters each contribute 15 percent, and your mother contributes 15 percent toward her own support.
Since you and your sisters contribute more than half of your mother’s support (40 + 15 + 15 + 15 = 85 percent), a multiple support agreement can be used for one of you to claim your mother as a dependent and receive her personal exemption.
Any one of you may claim your mother as a dependent, but only one of you each year, and this can be done on alternating years. IRS Form 2120 Multiple Support Agreement must be signed by all who contribute greater than 10 percent to the parent’s support. Contributing more than 10 percent is a requirement to claim the dependent.
A worksheet for determining support in order to claim an older adult as a dependent and receive a personal exemption can be found at www.irs.gov/pub/irs-pdf/p501.pdf. Once completed, the worksheet will determine who can claim the older adult. It should be
retained, with documentation to support the schedule, with the tax records of the individual making the claim. Taxpayers in the top tax brackets will experience the phase-out, a provision of the tax code that reduces itemized deductions and personal exemptions, sometimes to zero, simply because of the amount of their income.
A knowledgeable and trustworthy tax professional can be the most valuable asset in determining who can and should claim an older adult as a dependent. Financial advisors should be aware of these tax benefits and refer their clients to tax professionals
for assistance. •CSA
Supporting an Older Relative: A Surprising Tax Benefit was recently published in the Summer 2014 edition of the CSA Journal.
