The fabled Baby Boom began in 1946, right after World War II. Therefore, the oldest Baby Boomers reached 66 in 2012, which is now the full retirement age for Social Security. As millions of Boomers near and reach retirement, however, many are feeling family-related financial strains. A recent survey by Ameriprise Financial found that many Boomers provide aid to their elderly parents. For example, 22% of respondents help their parents to buy groceries, 15% aid with medical bills, and 14% contribute to outlays for utility bills. Some Boomers reported that these expenses have reduced the amount they save for their own retirement.

Tax Threshold

If you are in the previously mentioned situation, you should try to take advantage of all possible tax benefits. The money you save in taxes may be invested for your retirement. For example, you might be able to claim a dependency exemption for a parent you’re supporting. You’ll get a tax deduction of $3,900 in 2013 (estimated as of this writing) for each exemption you claim. Depending on your tax bracket, you might save well over $1,000 for each dependent. To get a dependency exemption for a parent as a “qualifying relative,” you must pass several tests. For example, your dependent must have less than an estimated $3,900 in gross income this year. Tax-exempt income doesn’t count as gross income, and that includes certain Social Security benefits. Example 1: Ken and Carol Grant help to support Carol’s widowed mother, Helen. In 2013, Helen collects $8,000 in Social Security benefits. Her only other income comes from bank account interest, which is minimal. Under the tax code, a single taxpayer owes no income tax on Social Security benefits if combined income (adjusted gross income plus nontaxable interest plus half of Social Security benefits) is less than $25,000. Helen’s total is under the threshold, so her Social Security benefits are not taxable and not included for this calculation. Thus, Helen meets the income test to be treated as a dependent.

Counting Costs

Besides the income test, you must provide over half of the dependent’s support. That is, you must pay more than 50% of the amounts spent on the other person’s food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities. Example 2: In 2013, Carol’s mother, Helen, spends a total of $18,000 for necessary living expenses listed previously. If Ken and Carol provide over 50% of that amount—$9,000—they pass this test for claiming Helen as a dependent. If Helen lives with Ken and Carol, the Grants will find it easier to pass this 50% support test. That’s because they can include the fair rental value of the housing they provide in the total of their contributions. If Helen would pay $1,000 a month to rent comparable lodging from a third party, yet she lives with the Grants rent free, then Ken and Carol can include that $1,000 a month in the support they provide: $12,000 a year.

Addition to Deductions

If your parent qualifies as a dependent, the tax savings may go beyond the dependency exemption. You also might be able to get a medical deduction. Money you spend for a dependent parent’s qualified health care costs can be added to your own medical bills, increasing your chances for an itemized medical deduction. You also may be able to include a parent’s medical expenses on your tax return even if that parent is not a dependent, as long as you provided over half of his or her support during the year. The income and support tests, as described, are the keys to claiming a parent as a dependent for tax purposes. Other criteria apply; some taxpayers may receive reduced exemption amounts, depending on current law, and some taxpayers are shut out from any dependency exemptions. In essence, the rules in this area are quite complex, even by the standards of the Internal Revenue Code. Our office can help you deal with all the fine print and show you how to claim parents or other loved ones as dependents, if that would be practical.

Multiple Method

In some families, more than one sibling will help to support an elderly parent. Then, no one taxpayer may qualify for the dependency exemption. Example 3: While the Grants help to support Carol Grant’s mother, as described, Carol’s brother Jeff also helps their mother, Helen, to make ends meet. Even though Jeff and the Grants together provide over 50% of Helen’s support this year, neither taxpayer is over the 50% mark. In such a situation, if all other hurdles are cleared, the contributing parties can agree to allocate the dependency exemption to one taxpayer. The taxpayer claiming the exemption must receive from each taxpayer eligible to claim the exemption a signed statement waiving his or her right to claim the person as a dependent for the year. The taxpayer claiming the exemption must attach to his or her return for the year he or she is claiming the exemption a statement that (1) identifies all the taxpayers eligible to claim the person as a dependent and (2) indicates that he or she has received a signed waiver statement from each of these taxpayers. IRS Form 2120 can be used for this purpose. Assuming they contribute equal amounts, Jeff and the Grants can alternate so that they take turns claiming Helen as a dependent every other year.

 

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