Tax Benefits of Supporting Your Parents

Did you know you could be responsible for your parents’ unpaid bills? Ever heard of Filial Responsibility Laws?  Well, these are laws obligating you to provide financial support for your indigent parents.  Yes, obligated under law.  According to the National Center for Policy Analysis, 21 states across the country (including states like Connecticut, New Jersey and Massachusetts) allow for a civil action to obtain financial support for indigent parents.   At least 12 states may impose criminal penalties on children who refuse to support their parents.  Though rarely enforced, these laws may be dusted off by states looking to save money on Medicaid bills.

Most adult children nonetheless feel a moral obligation to provide needed support for their parents.  For those so inclined, here’s some good news – US tax laws actually provide tax breaks for those who choose to assist their aging parents.

Head of Household status

If you are unmarried, instead of the less favorable “single” (unmarried) status, you may treated as “head of household” if you meet the following requirements:

  • You are unmarried or considered unmarried on the last day of the year
  • You paid more than half the cost of keeping your home. Your parent does not have to live in your home provided he/she qualifies as your dependent (see below).  Your parent may live in his/her home or in an assisted living facility.

Head of household status entitles you to more favorable tax rates (better than single individuals) plus:

  • Increased standard deduction amount (if you do not itemize)
  • Higher exemption amount for alternative minimum tax (AMT) purposes

Dependency Exemption

The dependency exemption is a tax deduction ($4,000 in 2015; $4,050 in 2016) that you can claim whether or not you itemize personal deductions. Your parent is allowed as a “qualified relative” though to take the exemption, you must meet the following conditions:

  • You have to provide more than half of your parent’s support. Gross income calculation for this purpose does not include Social Security benefits excluded from income and income received that is not used for support.   An IRS-provided example:  Your mother received $2,400 in Social Security benefits and $300 in interest.  She paid $2,000 for lodging and $400 for recreation and put $300 in a savings account.  Even though your mother received a total of $2,700 ($2,400 + $300), she spent only $2,400 ($2,000 + $400) for her own support.  If you spent more than $2,400 for her support and no other support was received, you have provided more than half of her support.
  • Your parent’s gross income does not exceed the exemption amount.

Medical Expenses

If you pay your parent’s medical expenses and you itemize your personal deductions (on Schedule A), you can add these costs to your own in figuring your deduction.  This is available to you if you pay more than half of your parent’s support, whether or not you can claim him/her as a dependent.   However, in determining your itemized medical deduction, you may use the adjusted gross income threshold for you, not the one otherwise available to your parent.  Thus, if you are under 65, only the out-of-pocket expenses medical costs for you (and your parent) are deductible to the extent they exceed 10% of your adjusted gross income, notwithstanding your parent’s older age.

Dependent Care Credit

If your parent lives in your home, you may be able to claim a tax credit enabling you to work.  The child and dependent care credit is a credit which directly goes to reduce your payable tax for the year.  The credit can be claimed for the costs of caring for a parent if he/she is physically or mentally unable to care for him/herself and qualifies as your dependent.

However, the amount of the credit available to you depends on your adjusted gross income.   The maximum credit is 35% of $3,000 of qualifying expenses, or $1,050.  If your AGI is $43,000 or more, your credit is limited to 20% of $3,000, or $600.   It is good tax practice to file a Schedule H of Form 1040 to report employment taxes related to the worker who is hired to care for your parent in your home.

If you have questions about your financial obligations towards your elderly parents, or you want to know about the tax benefits of helping them, call THE TAX EXPERTS at the Thorgood Law Firm For a FREE consultation, call 212-490-0704.

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