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When are older parents considered dependents?
The IRS is, of course, the go-to source for information on tax rules. Some common sense rules apply. For example, the parent must be a U.S. citizen, national, or resident alien. U.S. Citizens residing in Canada or Mexico may also be claimed as dependents. The parent must be your legal parent, step-parent, or mother/father-in-law; foster parents may not be claimed. It is important to note you may also claim other adult relatives such as grandparents, aunts and uncles, nieces and nephews, if they meet the remaining criteria. You may not claim your own adult children.
You must be able to provide your parent’s full name and social security number to claim them as a dependent. They do not have to live with you, but may live in their own home, a family home, or a care facility, as long as you are mostly responsible for funding their care. You, as the filer, cannot be claimed as a dependent on someone else’s tax filing. The parent you claim also may not file a joint return, so if one parent is filing taxes and one is your dependent, the one filing should file separately.
The IRS states that parents who are claimed as dependents must not exceed the gross income test limit, which for tax year 2021 is $4,300. This generally does not include income from Social Security. However, there are exceptions if they receive income from dividends or interest and total income is in excess of $25,000 - Social Security then becomes partly taxable income. Your parent’s income will also include taxable payments from pensions and unemployment.
The IRS also states that to claim a parent as a dependent, you must financially provide for at least 50% of their care. Your support includes all money spent on your parents, whether it goes to lodging, food, medical bills and prescriptions, living expenses, dental care, utilities, recreation, or transportation costs. If your parent lives in your home, you should determine the market value for the room they occupy, considering what you could charge for rent for the same space, and count it as an expense. Your support also includes any government assistance you spend on their care, including food stamps and housing assistance. When considering the percentage of care you fund compared to what your parent pays on their own, do not include any money they had but did not spend on their own care.
Additionally, the support you provide must exceed your parent’s income. If you provide for 50% of their care, the amount you pay must be greater than their gross income by at least one dollar. So, for example, if you pay $2,500 a year in expenses, they must have an income of $2,499 or less to be claimed as your dependent. The greater their income, the more support you must provide in order to qualify.
What credits and deductions can I claim?
When you claim your parent as your dependent, you will qualify to receive certain tax benefits. The first, known as the Family and Other Dependents Credit, is worth $500 for each dependent. This is easy to qualify for and applies to most elderly dependents or those who are disabled. This credit should be applied automatically if you claim your parent as a dependent.
You may also claim any medical expenses you pay for your parent when they are your dependent. Using itemized deductions on schedule A of your tax form, you can claim itemized medical expenses paid on your parent’s behalf. Expenses may include copays or care expenses, medical equipment, and prescription medications. There is one caveat - the expenses must total more than 10% of your own adjusted gross income for the year in order to be deducted.
Another option is to apply for a dependent care credit. If your parents are unable to care for themselves and you require outside assistance because you are working or looking for work, you can claim the dependent care credit. You will need to be able to provide specific information on the caregiver, including full name, address, and Social Security number or employee identification number. This applies to private caregivers and home care agencies as well as care programs outside the home. Once again, there is a caveat - you may not claim the dependent care credit if you are married and filing separately.
What if I don’t pay for half of my parent’s care?
Sometimes, parents of multiple children have more than one child chipping in to help with their care, or other family members are able to help out financially. In these cases, it is unlikely that one child or family member will be responsible for the 50% of care expenses required to claim the parent as a dependent. When this occurs, each child or relative who pays at least 10% of the care expenses must complete a Form 2120, called a Multiple Support Declaration, and give the forms to one person who will then claim the parent as a dependent. This assumes that the total provided by all family members is more than 50% of the care expenses for the parent. Essentially, all of the siblings or family members release their claims to one sibling, who will then claim the parent as a dependent. The person claiming the dependent may change from year to year, so relatives may take turns making the claim.
Special Considerations Under the American Rescue Plan
Due to the COVID-19 pandemic, some tax rules have been temporarily changed or relaxed as part of the American Rescue Plan. This applies to the dependent care credit, which provides a tax credit for expenses incurred caring for elders while you work. For tax year 2021, there is an increase in the amount of eligible expenses. The amount of qualifying expenses goes up to $8,000, whereas it was previously $3,000 for a single parent - for two parentsin 2021, the limit is $16,000 instead of $6,000. Previously, 35% of qualifying expenses were eligible for the credit, but in 2021, 50% of qualifying expenses are eligible. Typically, the credit is reduced for those with incomes over $15,000; in 2021, the threshold for credit reduction is $125,000.
How can I make sure I’m doing this right?
When you consider adding a parent as a dependent, it would be wise to consult with a tax accountant or tax preparation service. They will ensure that you are following the rules appropriately and maximizing your credits and deductions. If you choose to file on your own, ensure that your parent’s income does not exceed the threshold, and be sure you are covering at least 50% of their care expenses. If you choose to itemize medical expenses, be sure to keep receipts in case of an audit.