As life expectancies continue to increase, it becomes increasingly likely that you may need to financially help an aging parent. If you find yourself in that situation, review the tax laws to determine whether you can obtain some tax relief.
The key is to determine whether you can deduct your parent as a dependent, which entitles you to an additional personal exemption on your tax return, reducing your taxable income by $3,200 in 2005. To do so, your parent's gross income can't exceed the exemption amount and you must provide over half of your parent's support. For purposes of the gross income test, Social Security benefits typically aren't considered.
In some cases, you may share your parent's support with your siblings or other relatives. If the combined total equals more than half of your parent's support and each person contributes at least 10% toward this care, you can file a multiple support declaration. Even though more than one person contributed to the support, the parent can only be claimed as a dependent by one person. The multiple support declaration form informs the Internal Revenue Service of who is declaring the dependent for that tax year. You can change the declaration on a year-to-year basis so each person providing support receives some tax relief.
If you can claim your parent as a dependent, any medical expenses paid for your parent can be claimed as a medical deduction on your tax return. Your total medical expenses, including your parent's expenses, must still exceed 7.5% of your adjusted gross income before you can take the deduction. If you aren't able to claim your parent as a dependent due solely to the gross income test, you can still include your parent's medical expenses on your tax return. When calculating these expenses, be sure to include premiums for supplemental Medicare coverage and long-term-care insurance. If your parent lives with you and you must obtain outside care to go to work, you may be able to claim the dependent care credit. Also look into whether your employer offers a flexible spending account for elder care. This may allow you to set aside prepaid dollars to pay up to $5,000 of elder-care expenses for a dependent parent.