owadays, individuals frequently support one (or both) of their parents. Because of the increased financial burden this may entail, taxpayers should carefully examine and consider the tax breaks currently available to them.
A taxpayer can claim a dependency exemption for a parent if five requirements are met.
Gross income test. The dependent’s gross income cannot exceed the personal exemption. For 1999, that amount is $2,750. While the amount is relatively low, a parent whose primary source of income is Social Security may still be able to meet this test.
Support test. The taxpayer claiming the exemption must provide over half of the dependent’s support for the year. “Support” includes food, shelter, clothing, medical and dental care, education and the like. Payment of medical expenses (including medical insurance premiums) is support; medical insurance benefits are not.
If more than one child shares in a parent’s support, multiple support agreements (MSAs) may be used to realize tax savings. An MSA allows the children to claim a dependency exemption for the parent if none of them individually provides more than 50% of support. As long as the group provides more than 50% of the support, they can decide who should claim the exemption; that person need only have contributed more than 10% of the support. Only one exemption for a parent may be claimed in a given year; however, each year, the taxpayer claiming the exemption may change.
Relationship test. The dependent must either be related to the taxpayer or reside with the taxpayer as a member of his or her household for the entire tax year.
Citizen or resident test. The parent must be either a U.S. citizen or resident or a resident of Canada or Mexico.
Joint return test. The parent cannot file a joint return unless it is filed solely to claim a refund.
HEAD OF HOUSEHOLD
A single person who supports a parent may qualify for head-of-household status. This status is available to an unmarried taxpayer who maintains a household that constitutes the parent’s principal abode. A taxpayer “maintains a household” if he or she pays more than half of the cost of maintaining it during the tax year. Note that a dependent parent does not have to live with the taxpayer as long as the taxpayer provides more than half of the cost of maintaining a household that is the parent’s principal abode. Thus, a single taxpayer who pays more than half of the cost of a dependent parent’s nursing home may qualify as a head of household.
DEPENDENT CARE CREDIT
Taxpayers who incur expenses for the care of a parent may be entitled to a dependent care credit. Although this credit is typically used for child care expenses, it is also available to a taxpayer who maintains a household and must hire someone to care for a dependent “who is physically or mentally incapable of caring” for himself or herself. Such an individual might be incapable of caring for his or her own nutritional needs or personal hygiene or may require full-time care for his or her own safety—or that of others.
Taxpayers may take an itemized deduction for medical expenses for themselves, their spouses and their dependents, deductible to the extent the expenses exceed a percentage of the taxpayer’s adjusted gross income. Many types of expenses incurred by the elderly (such as doctor and hospital bills, nursing care services, hearing devices and batteries, oxygen and wheelchairs) qualify.
For a detailed discussion of the various tax breaks that may be available, see “Parental Support Tax Savings Opportunities,” by Timothy Koski, in the November 1999 issue of The Tax Adviser .
—Nicholas Fiore, editor
The Tax Adviser