#TaxTipTuesday-When an elderly parent might qualify as your dependent

 

 

 

It’s not uncommon for adult children to help support their aging parents. If you’re in this position, you might qualify for the adult-dependent exemption. It allows eligible taxpayers to deduct up to $4,050 for each adult dependent claimed on their 2016 tax return.

Basic qualifications

For you to qualify for the adult-dependent exemption, in most cases your parent must have less gross income for the tax year than the exemption amount. (Exceptions may apply if your parent is permanently and totally disabled.) Generally Social Security is excluded, but payments from dividends, interest and retirement plans are included.

In addition, you must have contributed more than 50% of your parent’s financial support. If you shared caregiving duties with a sibling and your combined support exceeded 50%, the exemption can be claimed even though no one individually provided more than 50%. However, only one of you can claim the exemption.

Factors to consider

Even though Social Security payments can usually be excluded from the adult dependent’s income, they can still affect your ability to qualify. Why? If your parent is using Social Security money to pay for medicine or other expenses, you may find that you aren’t meeting the 50% test.

Don’t forget about your home. If your parent lives with you, the amount of support you claim under the 50% test can include the fair market rental value of part of your residence. If the parent lives elsewhere — in his or her own residence or in an assisted-living facility or nursing home — any amount of financial support you contribute to that housing expense counts toward the 50% test.

Easing the financial burden

Sometimes caregivers fall just short of qualifying for the exemption. Should this happen, you may still be able to claim an itemized deduction for the medical expenses that you pay for the parent. To receive a tax benefit, the combined medical expenses paid for you, your dependents and your parent must exceed 10% of your adjusted gross income.

The adult-dependent exemption is just one tax break that you may be able to employ to ease the financial burden of caring for an elderly parent. Contact us for more information on qualifying for this break or others.

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The real definition of “dependent” may surprise you

Many people think of a “dependent” as a minor child who lives with you. This is true, but it’s important to remember dependents can include parents, other relatives and nonrelatives, and even children who don’t live with you.

Exemptions and your taxable income. Each dependent deduction is worth $4,050 on your 2016 and 2017 federal income tax returns. This exemption reduces your taxable income by this amount. You’ll lose part of the benefit when your adjusted gross income reaches a certain level. For 2016, the phase-out begins at $311,300 when you’re married filing jointly and $259,400 when you’re single.

Definition of a dependent. A dependent is a qualifying child or a qualifying relative. While there are specific rules, generally, a dependent is someone who lives with you and who meets several tests, including a support test. For qualifying children, the support test means the child cannot have provided more than half of his or her own support for the year. For qualifying relatives, the support test means you generally must provide more than half of that person’s total support during the year. There are many exceptions. For example, parents don’t have to live with you if they otherwise qualify, but certain other relatives do. If you’re divorced and a noncustodial parent, your child doesn’t necessarily have to live with you for the dependent deduction to apply.

Who can’t be claimed? Your spouse is never your dependent. In addition, you generally may not claim a married person as a dependent if that person files a joint return with a spouse. Also, a dependent must be a U.S. citizen, resident alien, national, or a resident of Canada or Mexico for part of the year.

For a seemingly simple deduction, claiming an exemption for a dependent can be quite complex. You’ll want to get it right, because being able to claim someone as a dependent can lead to other tax benefits, including the child tax credit, education credits, and the dependent care credit.

Contact our office to learn who qualifies as your dependent. We’ll help you make the most of your federal income tax exemptions.

Did you know that you can claim a federal income tax credit when you pay someone to care for your kids while you’re at work or school?

The Child and Dependent Care Credit is valuable because it reduces the amount of tax you owe dollar-for-dollar. Here’s an overview of the rules.

 
● Child care expenses must be work-related. This requirement means you have to pay for child care so you can work or actively look for work. If you’re married, you and your spouse must both work. Exceptions to this “earned income” rule include spouses who are full-time students or who are not able to care for themselves due to mental or physical limitations.

 
● Expenses generally must be paid for care of your under-age-13 child. However, expenses you pay to care for a physically or mentally disabled spouse or adult dependent may also count.

 
● Expenses must be paid to someone who is not your dependent. Amounts you pay your spouse, your child’s parent (such as an ex-spouse), anyone claimed as a dependent on your tax return, or your own child age 18 or younger do not qualify for the credit. For example, if you pay your 17-year-old dependent child to watch a younger sibling, that expense doesn’t count for purposes of claiming the credit.

 
● The care provider has to be identified on your tax return. You’ll typically need to show the name, address, and taxpayer identification number. You can request this information by asking your provider to complete Form W-10, Dependent Care Provider’s Identification and Certification.

 
● The amount you can claim depends on how much you spend for the care up to a dollar limit of $3,000 of expenses for one dependent and $6,000 for two or more dependents.

 
Contact us for more information.

Teach your child this vital skill

 

Financial literacy is a vital skill in today’s world. Will your children be able to handle their finances when they became adults? Here are tips to help ensure the answer is yes.

 
Shave spending. Take the weekly allowance to the next level by helping your child develop a budget. Review the results to reinforce good habits.

 
Stress savings. Even young children can grasp the power of compound interest. A simple example is asking your child to put a dollar in a piggy bank. Offer to pay five percent interest if the money is still there in a week or a month. Make the same offer at the end of the first time period, and pay “interest on the interest” as well.

 
Introduce investments. Create a portfolio, either real or paper, consisting of shares of one or more stocks or mutual funds. Make a game of charting the investment’s progress on a regular basis.

 
Cover credit. Take on the role of lender and let your child request an advance on a weekly allowance. Charge interest.

 
Talk taxes. Use word search or crossword puzzles to teach tax terminology. Consider creating a “Family Economy” game using examples from your own budget.

 

 
Lessons in financial responsibility can benefit your children now and in the future. Get them started on the right path.

 

 

 

 

Who can be your dependent?

You might believe a “dependent” is a minor child who lives with you. While that is essentially correct, dependents can include parents, other relatives and nonrelatives, and even children who don’t live with you. Here’s an overview of the dependency exemption.
Exemptions and your taxable income  Each dependent deduction is worth $4,000 on your 2015 federal income tax return, and reduces your taxable income by this amount. You’ll lose part of the benefit when your adjusted gross income reaches a certain level. For 2015, the phase-out begins at $309,900 when you’re married filing jointly and $258,250 when you’re single.
Definition of a dependent                                                                                                          A dependent is a qualifying child or a qualifying relative. While there are specific rules, very broadly speaking, a dependent is someone who lives with you and who meets several tests, including the support test. For qualifying children, the support test means the child cannot have provided more than half of his or her own support for the year. For qualifying relatives, the support test means you generally must provide more than half of that person’s total support during the year. There are many exceptions. For example, parents don’t have to live with you if they otherwise qualify, but certain other relatives do. If you’re divorced and a noncustodial parent, your child doesn’t necessarily have to live with you for the dependent deduction to apply.
Who can’t be claimed?                                                                                                    Your spouse is never your dependent. In addition, you generally may not claim a married person as a dependent if that person files a joint return with a spouse. Also, a dependent must be a U.S. citizen, resident alien, national, or a resident of Canada or Mexico for part of the year.
For a seemingly simple deduction, claiming an exemption for a dependent can be quite complex. You’ll want to get it right, because being able to claim someone as a dependent can lead to other tax benefits, including the child tax credit, education credits, and the dependent care credit.
Contact our office to learn who qualifies as your dependent. We’ll help you make the most of your federal income tax exemptions.