Tax Deals That Help You Care for a Parent
Get back from Uncle some of what you give Mom or Dad.
(MONEY Magazine) - Nearly one in five adult children provide financial assistance to an aging parent, spending, according to a study by Georgetown University's Center on an Aging Society, an average of $216 a month. But Uncle Sam can help you offset some of the costs.
• First, clear the hurdles. The IRS has strict rules on who can write off caregiving expenses. Your parent's income must fall below $3,000 in 2005 and $3,200 in 2006. Social Security doesn't count toward the limit, but other income (including dividends, interest and 401(k) withdrawals) does.
Second, you must provide more than 50% of your parent's financial support. In this case, Social Security dollars do count in the calculation, as does the fair market rental value of your parent's home. (If your mom or dad lives with you, the calculation works in your favor.)
• Talk amongst yourselves. Splitting Mom's care between siblings? Only one of you can claim her as a dependent. If you're chipping in equally, experts suggest alternating who takes the deduction each year--or giving it to the sibling who most needs the tax break.
• Track medical expenses. Even if your parent makes more than the $3,000 limit, you may be able to deduct some medical expenses. The test: You're footing at least half of the total bill, and medical expenses exceed 7.5% of your adjusted gross income. Alternatively, you can submit those receipts for reimbursement from your health savings account.
• Don't forget day care. If someone cares for your live-in parent while you're at work, you can pay up to $5,000 of the fees with pretax dollars if your employer offers a dependent-care FSA. If an FSA isn't an option, look into the child- and dependent-care credit, which can earn you a 20% to 35% credit on the first $3,000 in expenses.