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Bankrate's 2009 Tax Guide
Daily tax tip
Tax help in caring for your aging parent

They took care of you for years. Now it's your turn.

Millions of adult children find themselves looking after aging parents. Tax laws offer some help, as long as you and your folks meet the criteria.

In this tax tip:

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. This filing season, each exemption allows you to reduce your taxable income by $3,500.

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.

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. This is that $3,500 mentioned earlier. (Here's where kids get a break. This is not a test for a young dependent under the new uniform definition of a qualifying child.)

The income barrier represents taxable income, notes John W. Roth, a federal tax analyst with CCH Incorporated, 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. "And it's not even market-based income. If you have 10 accounts with $10,000 to $25,000 each earning even just 2.5 percent interest, it adds up."

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.

"Say mom doesn't have $3,500 taxable income, but gets $15,000 in Social Security and uses it to pay for some medicine and buy clothes. In that case, your contribution to her support may not come up to half."

-- Updated: Jan. 13, 2009
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