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Filing Taxes: Tax Deductions for Dependent Family Members

Written by Eva Rosenberg on June 11, 2013 in Tax  |   No comments

We were always told to be careful with my mother because she was frail and had a heart condition. My father died nearly 40 years ago. As for Mom? She’s still going strong at 91. My friend has a child with dyslexia and behavioral problems….

filing taxes, tax deductionWe were always told to be careful with my mother because she was frail and had a heart condition. My father died nearly 40 years ago. As for Mom? She’s still going strong at 91.

My friend has a child with dyslexia and behavioral problems. There’s a lot of love in that home, and they’re working things out.

What do my mom and my friend’s son have in common? The cost to support them and treat them is quite high. With life spans increasing, families across the country are finding themselves a part of what has been called the sandwich generation, squeezed between caring for parents and children at the same time.

Fortunately for these families, who may be spending tens of thousands of dollars each year to care for their dependents, there are ways to get tax deductions. It just requires some preparation before filing taxes.

Get everything in writing

Remember, the IRS and insurance companies have different standards, and getting the treatment in writing is critical for all tax purposes—regardless of how you handle the expenses.

Make sure the dependents you’re supporting are diagnosed by a physician, psychiatrist, therapist, or other appropriate medical professional. Once you’ve identified the specific individuals and institutions that will provide the treatment, get the medical professionals at those institutions to write prescriptions or treatment plans naming those professionals and/or organizations.

Deductible expenses

You’ll find a list of other medical expenses that qualify for deductions in IRS Publication 502. Some of them include:

  • Remedial tutoring or education for your child.
  • Boarding school—if the school specializes in your child’s issues.
  • The full cost of board and care at a convalescent facility or hospice if your parent is unable to live alone.
  • Specialty appliances, tools, and modifications added or made to devices and property, such as wheelchair ramps or ADA-compliant appliances. (Remember: If the improvements increase the value of the real estate you own, you must deduct the increase in value before claiming the deduction.)
  • Cost of attendants and caregivers if the dependent is staying in his or her home. If attendants are paid directly, you may want to put them on payroll.
  • Physical therapy.

Handling expenses and taxes

If your work offers a Flexible Spending Account (FSA), take full advantage of it. Although limited to $2,500 this year, both parents can use a FSA. This way, you avoid taxes on the first $5,000 in costs—both federal and state income taxes, as well as Social Security and Medicare taxes. This is worth roughly $1,300 to $2,100.

Next, claim the dependent care credit, which is worth about $600, in addition to the credit offered by your state.

Use the rest of the expenses as medical deductions. Unfortunately, if you’re under age 65, you must reduce your medical expenses by 10 percent of your adjusted gross income, as noted on the last line of Form 1040, page 1.

When families share in the cost of the care of a parent or child, it is likely that no one person (or couple) is providing more than half that individual’s support. Using Form 2120, you can allow one person (or couple) to claim the dependent each year. Take turns giving the dependent to a different support person each year.

This is just a brief overview. It’s well worth investing a couple of hours with a tax professional to address related issues, like drawing down your parents’ retirement account balances; how government aid effects taxes; and whether your support could cause the dependent to lose Medicaid benefits or make you responsible for his or her unpaid medical expenses.

Eva Rosenberg, EA is the publisher of TaxMama.com, where your tax questions are answered. She is the author of several books and ebooks, including Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.

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