It is common for family members to help other family members, financially.
It is also common for these families to leave money on the table by not taking all the tax breaks they could from these situations.
Often, adult children provide financial or other support for their parents, though other situations do arise.
Sometimes, the help is extended for a brief period, and other times it is for an extended stretch.
The adult child might provide financial assistance so the parent can receive in-home services. The services could be basic housekeeping and meal preparation.
The services might include nursing or other medical services. Or the adult child could pay for at least some of the cost of the parent residing at an assisted living or similar residence.
Other times, the adult child or other family member personally provides care for an older relative, either in the caregiver’s home or the home of the cared-for person.
The caregiver might pay some or all of the costs or might only provide personal services while the cared-for person pays for food, utilities and other expenses.
There are financial and tax consequences to each form of care.
Families should pay attention to the details and rules partly to ensure they receive maximum tax benefits and partly so each family member will feel he or she is treated fairly.
The first step is to determine if the cared-for person qualifies as a dependent on the caregiver’s tax return.
The Tax Cuts and Jobs Act enacted in 2017 eliminated the personal and dependent exemption amounts.
But when the cared-for person qualifies as a dependent, the caregiver might be able to deduct the cared-for person’s medical expenses and take other tax breaks.
Suppose “Max Profits” is helping his mother, “Minnie.”
Max can claim Minnie as a dependent if several tests are met. First, Minnie’s gross income for 2020 must be less than $4,300.
Social Security benefits and tax-exempt interest generally are not included in the income test.
If Minnie has savings or investments that generate too much taxable income, Max still might qualify for the exemption in the future if Minnie switches investments from taxable instruments to tax-exempt bonds or mutual funds.
In addition, Max must provide more than half of Minnie’s support for the year.
Support is living expenses such as clothing, housing, education, medical expenses, recreation and transportation.
If Minnie lives in Max’s residence, the fair market rental value of the housing is included in the support amount provided by Max.
The Profits will have to keep track of the amounts each spends on Minnie’s support during the year and might have to plan payments made near the end of the year, so Max meets the 50% test.
For a longer list of which expenditures qualify as support, check free IRS Publications 17 and 501, available at the website IRS.gov.
Minnie also must be a U.S. citizen or resident of North America.
Some relatives can be claimed as dependents, even if they don’t live in the same household.
Relatives who can be dependents without being in the same household are parents, step-parents, parents-in-law, grandparents, great-grandparents, aunts and uncles.
Anyone else can be a dependent only if he or she is a full-time member of the same household during the year.
Minnie also cannot file a joint tax return with another taxpayer, unless the return is filed only to receive a tax refund, and there is no tax liability for the year.
When several siblings share the support of someone, none might meet the 50% support test.
In that case, it still is possible for one of them to claim the person as a dependent.
All the siblings must sign IRS Form 2120, Multiple Support Declaration, agreeing on which one of them claims the person as a dependent.
The sibling who claims the person as a dependent files the form with his or her tax return.
Each signer of the form must contribute at least 10% of the person’s support for the year.
The siblings can adjust the amounts each contributes to the care to reflect that one of them might receive tax benefits.
The sibling claiming the person as a dependent can be rotated each year, or the same person can claim the person as a dependent.
A taxpayer who can claim someone as a dependent also can deduct medical expenses the taxpayer paid for the dependent.
Medical expenses paid on behalf of another person also might be deductible, even if the person for whom they were paid cannot be claimed as a dependent by the person paying the expenses.
Let’s go back to Max and Minnie. Suppose Minnie would qualify as Max’s dependent except for the income test.
In that case, Max can deduct any of Minnie’s medical expenses he pays. To ensure the deductions, Max should pay the medical providers directly instead of reimbursing Minnie.
When Max qualifies to deduct Minnie’s medical expenses, he adds those expenses to the rest of his and his family’s medical expenses.
To deduct medical expenses, Max must itemize expenses on his tax return, so the total of his itemized expenses must exceed the standard deduction.
Itemized expenses include medical expenses, charitable contributions and state and local taxes up to $10,000.
When Max itemizes expenses, he can deduct only the medical expenses that exceed 7.5% of his adjusted gross income.
When siblings have a multiple support agreement, only the person who can claim the dependent can deduct the medical expenses.
So, the person who qualified to claim the other person as a dependent should pay all the medical expenses.
Once Minnie qualifies as Max’s dependent, it is important for him to keep track of all the medical expenses he pays on Minnie’s behalf. Most people don’t realize all the expenses that qualify as medical expenses and unintentionally forego significant tax deductions.
For example, the cost of traveling to and from medical treatments and appointments is deductible at the rate of 16 cents per mile in 2021 and 17 cents in 2020.
Being able to claim a person as a dependent can lead to other tax breaks.
The care provider might be able to claim the child and dependent care credit for expenses paid to care for the person while the caretaker goes to work.
The credit is claimed by including Form 2441 with the income tax return.
When the care provider’s employer offers a dependent care flexible spending account (FSA), the care provider can elect to have salary contributed to the FSA tax free.
Then, the account can provide tax-free reimbursements for expenses paid for the person’s care.