Providing Care to an Elderly Parent?  You May Qualify for a Tax Break

As the caregiver of an elderly parent or relative, you may qualify for some tax breaks from the Federal government if you can claim your elderly parent or other relative as a dependent.  To qualify as a dependent, you must provide more than fifty (50%) of your relative’s support, and, in 2003, he or she cannot have income exceeding $3,050.00 or file a joint tax return with a spouse.  This income figure does not include tax-free interest, disability compensation or Social Security income.  If your relative qualifies as a dependent, here are the tax breaks for which you may be eligible:

1.      Dependent-care credit – This is worth up to $2,100.  You can take a tax credit of 20%-30% (depending on your income) of the first $3,000.00 you spend on care for each of your first two dependents or $6,000.00 total.  To qualify for the credit, the money you spend must be used to allow you to work.  For example, if your elderly dependent attends a nursing or day-care program so that you can work, you qualify for the credit.

2.      Flexible-spending accounts – This is worth up to $2,000.00.  Like a flexible spending account for health care expenses, this is a flexible spending account for dependent care.  You can fund this account with up to $5,000.00 pretax annually and then use the money to pay for elder and childcare.  One thing to keep in mind, however, is that you cannot take advantage of both the full dependent-care credit and the full dependent-care account.  The amount you put in a dependent-care account reduces the amount of dependent-care credit you have available.  For example, if you can claim two or more dependents and you fund the account with the full $5,000.00, you have $1,000.00 of expenses left upon which to take the credit.  Remember, however, if you decide to use a flexible spending account for dependent care you must use all of the monies in the account annually.  If you do not use it completely, you lose it.

3.      Sharing Care Expenses – If no one person in your family provides more than 50% of support to your elderly relative, but you provide that much collectively, you can take turns claiming your elder as a dependent.  You’ll need to fill out IRS form 2120, a Multiple Support Declaration.  Each person who provides more than 10% of support will have to sign the documents.