Your parents getting older and so are you – welcome to the sandwich generation! It’s not uncommon for adult children with children of their own to be supporting their aging parents and in-laws in the new millennium. If you’re in this position, keep in mind that the adult-dependent exemption has been removed by tax reform legislation, but there are still some tax breaks out there to benefit you and estate planning techniques to protect your elderly loved ones.
Look at these through another perspective – not just for kids only:
Child Tax Credit
Tax Reform created a new, nonrefundable credit of $500 for each dependent who is not a qualifying child, for example your elderly parent or in-laws. The credit begins to phase out for couples with adjusted gross incomes over $400,000 and $200,000 for all other filers.
The Child and Dependent Care Credit
If you paid for someone to take care of your parent so you could work or actively look for work, you might qualify for a credit that generally runs 20% to 35% of up to $3,000 of adult daycare ($6000 for two) and similar costs (depending on your AGI). Tax credits directly reduce the amount of tax you owe, giving you a dollar-for-dollar reduction of your tax liability. IRS rules say Mom or Dad must have been physically or mentally incapable of self-care and must have lived with you for more than half the year. You’ll need to have earned income to take this credit, and you’ll need to provide detailed information about the care provider. The qualifying expenses must be reduced by the amount of any dependent care benefits provided by your employer that you deduct or exclude from your income.
Your Employer’s Dependent Care Benefits
Folks assume a Dependent Care FSA offered by an employer is just for child care. But elder daycare for a loved one, so that you can go to work, maybe included too! The IRS will exclude up to $5,000 of your pay that you have your employer divert to a dependent care FSA account, which means you avoid paying taxes on that money. That can be a huge win if Mom or Dad are your dependents. What’s covered can vary among employers, so double-check your plan’s documents.
Hooray for the HSA
You probably already know that you can use your Health Savings Account (HSA) funds to pay for IRS approved health care and medical expenses as well as some health insurance deductibles and coinsurance, right? And you probably also know that you can use your HSA funds to pay for qualified expenses for your spouse or children, right? BUT, are you aware that HSA funds can also be used to pay for qualified medical expenses and qualified long-term care services for an elderly parent that is also considered your dependent? The IRS rules are a bit complex for this article, find out more here and see what is an eligible medical expense (you may be pleasantly surprised!): https://www.irs.gov/publications/p969
The Medical Expenses Deduction
Medical Expenses Deductions survived despite efforts to eliminate them, and going forward, they are actually more generous than in the past. You may be able to claim an itemized deduction for the medical expenses that you pay for Mom or Dad. To receive a tax benefit, the combined medical expenses paid for you, your dependents and your parent must exceed 7.5% of your adjusted gross income for 2018 and 10% in 2019.
In other words, if you paid for Mom’s hospital stay or footed the bill for Dad’s expensive medical or dental care and weren’t reimbursed by insurance or other programs, you might be able to deduct the cost. State thresholds come into play here – the state you live in might have a lower AGI threshold, which could save you money, and get you a break on state income taxes even if not on your federal income taxes. A full list of eligible medical expenses and other info can be found here: https://www.irs.gov/forms-pubs/about-publication-502
Estate Planning
Consider including your parents as beneficiaries of your estate plan. Here are some tips to consider:
PS: While you are discussing finances with the family, remind your parents or in-laws that tax reform legislation did not do away with the Senior Tax Credit for the Elderly and Disabled as expected, which is worth $1125 to low-income taxpayers 65 years or more.
You have questions? We have answers. Join the New Financial Dialogue and let our family take care of your family. Contact us at CPA@Fuoco.com.
