How to Take Write-offs for Helping Relatives

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Give yourself permission to write a bad chapter.  You can always edit.  But you can’t edit what you haven’t written. 
                    -Brad Thor

It’s very common for family members to become caregivers for other family members or help them financially when medical care or long-term care is needed. It’s also common for these families to leave money on the table by not taking all the tax breaks they could.

The care could take many forms.

An adult child might help pay for in-home services for a parent. The services could be basic housekeeping and meal preparation, or they might include nursing or other medical services. Or the adult child could pay for all or some of the cost of an assisted living or similar residence for the parent.

Other times an adult child or other family member personally provides care for an older relative, either in the caretaker’s home or the home of the cared-for person. The caretaker might pay some or all of the costs or might only provide personal services while the cared-for person’s resources pay 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 caretaker’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 caretaker might be able to deduct the cared-for person’s medical expenses and take other tax breaks.

Suppose Max Profits helps his mother, Minnie.

Max can claim Minnie as a dependent if several tests are met. First, Minnie’s gross income for 2021 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 so they generate less income.

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 web site www.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 live in a different household. These relatives are parents, step-parents, parents-in-law, grandparents, great-grandparents, and 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 can’t 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.

Though a dependency exemption can’t be deducted under current law, a taxpayer who can claim someone as a dependent can deduct medical expenses the taxpayer paid for the dependent.

But you might not have to be able to claim someone as a dependent to deduct medical expenses paid on his or her behalf.

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.

Max 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’s 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.

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.

Credit Given to:  Bob Carlson. This article was published in Forbes on July 21, 2021.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Bobbie Haines

 -until next week.