When Dad = Tax Deduction

This week, Gail explains what it takes to deduct the cost of caring for an elderly relative.

Hi, Gail,
My 86-year-old father lives with my family year-round. Overall this arrangement has been great, especially since it’s given our kids an opportunity to really know their grandfather. A few times each year dad leaves “home” to visit my brothers and sister who live in other states.
Dad gets about $4,800 per year from Social Security, but in the past year his medical bills have just about eaten up the entire amount. My siblings and I have been chipping in to pay for the bills dad can’t cover. Can we deduct dad as a “dependant?”

Thanks,
Tina

Dear Tina,

Welcome to the “Sandwich Generation!" Thanks to improved life expectancies, our parents are living longer than ever before. In fact, according to the American Society of Actuaries, a man who is 65-years-old today has a 25 percent probability of living to age 92; a 65-year-old woman has a one-in-four chance of reaching 94!

In many cases this creates a role-reversal, with the “child” taking on the role of caring for mom, dad, or some other older relative. Often, the caregiver still has her/his own children living in the home, as well.

According to Sonya King, assistant editor of National Underwriter’s Tax Facts, there are several ways you might be able to see some tax relief for the support you’re providing your dad. In either case, only the taxpayer who provides the house dad calls “home” is eligible for the deduction. Since your father lives with you most of the year, this means your brothers and sister are not eligible to deduct any of the money they’re spending on his care.

Deducting Dad
You and your husband will see the biggest benefit if dad qualifies as your “dependent” and can be claimed as such along with your children. As you might expect, there are some strict “tests” you have to pass in order to do this:

1. The individual is either a) a relative, or b) is a member of your household who has lived with you the entire year, and

2. The individual is a citizen or national of the United States or a resident of the U.S., Canada, or Mexico, and

3. The individual is not filing his/her own tax return (you can’t take a “personal exemption” on your own return and be listed as a “dependent” on someone else’s) and did not file a joint return with a spouse except to get a tax refund, and

4. You provided more than half the individual’s support. This includes the cost of equivalent housing in your area, utilities, food, medical care, transportation, etc., and

5. The individual’s gross income did not equal or exceed the exemption amount for that tax year. According to King, dad’s income would have to be less than $3,200 in order for him to pass this requirement for the 2005 tax year. (In 2006 it’s $3,300).

Unfortunately, dad only qualifies on four out of the five tests: you cannot claim him as a “dependent.”

However, King says if an individual fails to meet the gross income or joint return test, but passes the other requirements (No. 1, No. 2 and No. 4 above), you can at least deduct any of his medical expenses [that you paid for]. These would get added to the out-of-pocket medical bills you paid for the rest of your family that year.*

Adding Dad’s Medical Bills to Yours
Medical costs that you pay and which are not reimbursed by insurance—braces, eyeglasses, prescription co-payments, and so forth—are listed under “Medical and Dental Expenses.” You don’t see any benefit (deduction) from this until the total exceeds 7.5 percent of your Adjusted Gross Income (AGI), which is a pretty high number. Being able to add dad’s medical expenses to those for the rest of your family just might be enough to put you over that threshold.

Here’s the key: you have to be able to prove that [you] actually paid these bills on dad’s behalf. If dad or your brother wrote the check, this doesn’t count. However, you may have paid for more of your father’s medical-related expenses than you realize. King suggests you check IRS Publication 501 and Publication 502 for a list of eligible expenses. You’ll find these at www.irs.gov.

For instance, did you make any modifications to your home to accommodate dad, such as installing a wheelchair ramp, widening doorways, or adding grab bars in the bathroom? These would qualify as “medical aids.” How about mileage for the times you drove dad to the doctor or pharmacy? Did you pay any caregivers? What about paying any health insurance premiums for your father?

It Pays to Plan
As the only person eligible for this deduction, it makes a lot of sense for you to target the money you’re contributing toward your father’s care. To the extent possible, have dad use his Social Security income to pay for as many of his [non]-medical expenses as possible—airline tickets to visit his other children, clothing, a new T.V. for his room, and so forth. That will enable you to “bunch” your contributions toward covering his doctor visits, medications, and other health-related items so you can take a bigger deduction.

For instance, say you shelled out $500 to help cover dad’s living expenses in 2005. And say $125 of that was your share of the $500 in medical expenses (each child paying 25 percent) dad didn’t have the money to cover. As a result, all you can add to the total amount of “medical expenses” you list on your 2005 tax return is $125.

By doing a little planning, you can contribute the same [total] amount of money to dad’s care this year, but increase the deduction you get.

Assume dad has the same expenses as last year. The difference is that this year you tell your siblings that your contribution is earmarked for the first $500 in [health-related] costs that dad can’t afford to pay himself. This would enable you to include the full amount in the “family” total for out-of-pocket medical expenses.

Getting Credit for Dad
In addition, depending upon your income and how spry dad is, you might also qualify for the Child and Dependent Care [Credit]. This is available if you pay someone else to care for either a child or some other dependent (such as a spouse, parent) so that you can work or look for work. The dependent must live with you for at least half the year and be:
a) Under age 13, or
b) Any age and physically or mentally unable to care for him/herself

Credit vs. Deduction
A tax “credit” is a lot more valuable than a tax “deduction” since a credit is subtracted [after] you calculate your actual tax bill. The amount of credit you receive under this program is a percentage of the expenses you paid the person providing the care. For the 2005 tax year, the maximum credit you can claim is $3,000 for one dependent or $6,000 for two or more. If you receive any payments from an employer benefit plan to help cover this cost, this reduces the credit amount.

Note: you can’t qualify for the Child and Dependent Care Credit unless you have income from a job or a profitable business that you own. In addition, you cannot file as “Married, Separate.”

It’s interesting that the “caregiver” you pay can be a member of your own family, provided this person is not someone else you claim as a dependent or a child under age 19. In addition, the care does not need to be provided in your home.

For more information about the Child and Dependent Care Credit head to the IRS website, www.irs.gov. Then do a search for Publication 503.

Hope this helps,
Gail

*See Treasury Regulation 1.213-1(a)(3)(i)