IRS rules for claiming a parent as a dependent: 5 factors to consider

More than 40 percent of family caregivers spend at least $5,000 a year on caregiving, according to Caring.com, a Bankrate company. Nearly 25 percent of family caregivers spend $10,000 or more.

While taking care of aging parents can get expensive, caregivers may qualify for some financial relief at tax time.

The key to Internal Revenue Service assistance in caring for an elderly relative is whether you can claim the person as a dependent. Any dependent must meet certain tests. While there is a little flexibility when dealing with children, fewer exceptions are granted when the potential dependent is older.

Despite the qualification obstacles, it doesn’t hurt to explore whether you can claim your parent as a dependent. If you and your parent meet IRS requirements, you’ll be able to claim an added personal exemption on your income tax return.

Then there are possible deductions and credits. If you pay medical expenses for a dependent parent, you may be able to deduct some of those costs. Hire a caregiver to help you out, and a credit could cut your tax bill a bit more.

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Dependency hurdles

The highest dependency hurdle is the amount of income your older parent earns. A dependent parent cannot make more than the exemption amount. The income barrier represents taxable income, notes John W. Roth, a senior federal tax analyst with Wolters Kluwer CCH, a national tax and business law publisher.

“Social Security normally is excludable, but if they have other income, which in many cases means interest and dividends, some is taxable,” Roth says. “So you want to start with that first in determining if the parent meets the income test.

“It’s amazing how that generation has invested in stocks, bonds, saving accounts and how quickly it can add up,” says Roth.

Such disciplined saving habits mean that many adult children cannot claim mom or dad as a dependent. If, however, you and your parent meet the income standard, the next consideration is how much support you provide.

Paying for more than half

To be deemed a dependent for tax purposes, your parent must get more than half of his or her support from you.

“When the parent lives in your home, to reach the 50 percent-plus threshold, you should take into account the fair-market room rental, food, medicine and other little support items,” says Roth. “This is where Social Security does come into play. If a parent is using benefits to pay for some of these support items, it goes into the calculation of whether you cover more than half of your parent’s support costs.”

A parent may not meet the tax exemption level as far as taxable income, but gets $15,000 in Social Security and uses it to pay for some medicine and buy clothes. In that case, the adult child’s contribution may not meet the support threshold.

The one bit of wiggle room here is that your parent doesn’t have to live with you. When a parent is able to remain in his or her own house, in an assisted living facility or a nursing home, costs you pay for parental support at those locations count toward meeting the IRS requirement.

Be careful, though, in determining what is support. Uncle Sam may not agree with what you and your parent consider vital. For example, items such as furniture, appliances or even cars can, in some instances, be counted as support; other times the IRS says “no.” For details and examples, check IRS Publication 501, Exemptions, Standard Deduction, and Filing Information. The booklet also contains a worksheet to help you figure your support contributions.

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Counting medical and other costs

Once your parent does meet the IRS dependency tests, you can use any medical expenses you pay for mom or dad toward this itemized deduction. Since medical costs must exceed 10 percent of your adjusted gross income before you can claim them, a parent’s added expenses could help you meet the requirements.

And the IRS offers a little leeway here. If your parent isn’t considered a dependent for exemption purposes simply because he or she earned too much but met the other tests, the IRS says mom or dad still could be counted as a dependent for medical deduction purposes.

When adding up those parental medical costs, don’t forget premiums for supplementary Medicare coverage or long-term care insurance. Once your parent is your dependent, some of these payments that you make can be counted toward your deductible-medical expenses.

And if your dependent parent lives with you and requires continual care, Roth says, you may be eligible for another tax break. What you spend for this attention generally won’t count toward the medical deduction. But if it’s necessary so that you can go to work, you can claim the dependent-care credit.

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Siblings sharing support

Sometimes, you don’t have to shoulder the load alone. Many adult children get help from siblings in caring for mom and dad.

Not only does this help maintain your day-to-day bank balance, it also spreads out any tax breaks. Where none of you solely pays for half of a parent’s support, but each contributes at least 10 percent toward parental care, take a look at the IRS’ multiple support declaration. This form helps you account for the tax implications of a shared-care arrangement.

Roth offers this example: Mom is in a nursing home. Her Social Security covers 40 percent of the facility’s costs, and you and your two brothers split the remainder, each paying 20 percent. Because more than half of her support comes from her three kids, she can be claimed as a dependent — but by only one of you. That choice is left to you and your brothers.

After you and your siblings agree that you can claim mom as a dependent this tax year, file Form 2120, Multiple Support Declaration, with your tax return. This form indicates that while several siblings contributed to mom’s support, the others waive any tax-exemption claim.

You also need to get signed statements from your brothers acknowledging they waived their tax claims. You don’t have to send these documents with your Form 1040, but keep them in your records in case the IRS ever questions your exemption or medical deduction claims.

And the best news about a multiple support agreement is that it’s not permanent.

“You can rotate it around from tax year to tax year,” says Roth. “The next year, another sibling takes the responsibility and the third brother the next year. It softens the blow, but it’s not going to cover all that it’s going to cost you.”