For many families, the tables may turn, and adult children provide financial support for their parents. For example, you might have moved your in-laws from a long-term care facility into your home during the pandemic for safety and convenience. Or your widowed father might still live in his own home, but his pension might not be enough to cover his living expenses, so you pay his rent and substantial medical costs.
If you pay over half the cost of supporting a parent – regardless of whether he or she lives in your home – the individual may be considered your dependent for federal income tax purposes. That may entitle you to some meaningful tax breaks. Here are the details.
Tax-Favored Head of Household Filing Status
For unmarried individuals, a common (and expensive) error is filing as a single taxpayer when head of household (HOH) filing status is allowed. Compared to single taxpayers, heads of households are entitled to wider tax brackets and bigger standard deductions. So, using HOH filing status can save you significant tax dollars.
If you’re unmarried and pay over half the cost of maintaining your dependent parent’s principal home for the year, you can use beneficial HOH filing status based on your dependent parent. Plus, there’s no requirement for you and your dependent parent to live in the same household.
There are two requirements for your parent to be treated as your dependent for HOH filing status eligibility purposes:
- You must pay over half of your parent’s support.
- Your parent must also pass a gross income test to be treated as your dependent for HOH filing status eligibility purposes.
Your dependent parent passes the gross income test for 2020 and 2021 if he or she has gross income of no more than $4,300. For the gross income test, ignore any tax-free Social Security benefits. However, those tax-free benefits must be considered in determining if you pay over half of your parent’s support.
For example, Billie is unmarried. In 2021, she pays over half the support for her widowed mother, who still lives in her own home. Billie also pays over half the cost of maintaining her mother’s home for the year.
Her mother’s gross income consists of $20,000 of tax-free Social Security and $300 of annual interest income, all of which she uses for her own support. Because the Social Security benefits are ignored for the gross income test, Billie’s mother passes the gross income test.
As a result, for 2021, Billie’s mother qualifies as a dependent for HOH filing status eligibility purposes because:
- Her mother passes the gross income test,
- Billie pays over half of her mother’s support for the year, and
- Billie pays over half of the cost of maintaining her mother’s home for the year.
“Family” Credit for Non-Child Dependents
For 2018 through 2025, the Tax Cuts and Jobs Act established a $500 federal income tax credit for dependents who don’t qualify for the more lucrative child tax credit. So, a dependent parent can make you eligible for the $500 credit. However, your parent must pass the gross income test to be classified as your dependent for purposes of this credit. You must also pay over half of your parent’s support.
Continuing with the hypothetical example, Billie would be eligible for this credit for her mother, because:
- Her mother passes the gross income test, and
- Billie pays over half of her mother’s support for the year.
Deduction for Medical Expenses
You can claim an itemized deduction for medical expenses paid for you, your spouse and your dependents, to the extent those expenses exceed 7.5% of your adjusted gross income (AGI). Clearing this AGI hurdle can be less difficult when you’re paying significant medical expenses for a dependent parent.
You must pay over half of your parent’s support for your parent to be classified as your dependent for medical expense deduction purposes. However, the gross income test doesn’t apply when determining whether a parent is your dependent for medial expense deduction purposes.
Important: To claim deductions for a dependent parent’s medical expenses, you must make direct payments to medical service providers. Reimbursing your parent for expenses that he or she paid won’t get you any deduction.
For itemized medical expense deduction purposes, your dependent parent’s medical expenses can include (but aren’t limited to) the following items that you pay on your parent’s behalf:
- Health insurance premiums, including Medicare premiums,
- Out-of-pocket medical expenses, including insurance copayments and deductibles and expenditures for dental and vision care, and
- Qualified long-term care (LTC) insurance premiums.
Premiums for qualified LTC insurance policies count as medical expenses for itemized deduction purposes, subject to the age-bases limits. For each covered person, count the lesser of 1) premiums actually paid, or 2) the applicable age-based limit. (See “2021 Age-Based Premium Limits for Qualified Long-Terms Insurance Policies” at right for age-based limits for 2021.)
To determine if you incurred enough medical expenses to claim an itemized deduction, add up all the qualifying medical expenses for you, your spouse and your dependents – including your dependent parent, if applicable.
To itemize, your total itemized deductions must exceed your allowable standard deduction. For 2021, the following standard deduction amounts generally apply:
- $12,550 for single filers.
- $18,800 for heads of households.
- $25,100 for married joint-filing couples.
Continuing with our hypothetical example, Billie’s total itemized deductions, including medical expenses in excess of 7.5% of AGI, are only $17,500 for the year. This amount is less than the standard deduction of $18,800 for heads of households for 2021. Because Billie doesn’t itemize deductions for 2021, she can’t deduct any medical expenses she paid on her dependent-mother’s behalf for the year.
The Dependent Care Credit
Taxpayers with one or more qualifying individuals under their wings may also be eligible for the child and dependent care credit (CDCC). The credit covers eligible expenses that you pay to care for one or more qualifying individuals so you can work, or if you’re married, so both you and your spouse can work. Qualifying individuals can include a dependent parent who lives with you for over half the year and who is physically or mentally incapable of self-care. The maximum CDCC for a qualifying dependent parent is $4,000 for 2021, subject to an income phaseout rule.
Get It Right
Helping your parent out financially can qualify you for some well-deserved tax breaks. Your tax professional can make sure that you collect all the breaks you are entitled to.
|2021 Age-Based Premium Limits for Qualified Long-Term Care Policies