Claim Your Parent as a Dependent to Maximize Your Tax Breaks

By September 11, 2019 Tax
Mother and Daughter Happily Baking Together | Claim Your Parent as a Dependent to Maximize Tax Breaks

The Tax Cuts and Jobs Act (TCJA), passed in 2017, eliminated or modified a number of provisions. However, in their place, the TCJA created new options to reduce taxable income or tax liability. Provisions related to deductions on dependents were among those affected.

If you are providing substantial support to your parents (or other adults), you may qualify for significant tax breaks.

What’s in this article?

What could a family claim on taxes prior to the Tax Cuts and Jobs Act?

Prior to the TCJA law passage, a taxpayer was eligible to claim a personal exemption. Personal exemptions were used to decrease taxable income before calculating taxes owed. Typically, the taxpayer was able to exempt themselves, their spouse if they filed jointly, and each of their other dependents, such as their children.

Until 2018, each personal exemption reduced gross income by $4,050. Eventually, the exemption amount decreased with Adjusted Gross Income (AGI) of $261,500 to $384,000. If the tax return was filed jointly, the exemption amount lowered with AGI of $313,800 to $436,300.

By signing the TCJA into law, President Trump eliminated personal and dependent exemptions for tax years 2018 through 2025. However, in their place, he expanded the existing Child Tax Credit and introduced a new type of credit – the non-child credit – available to taxpayers with qualified dependents.

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What is the Non-Child Tax Credit?

The Non-Child Tax Credit, also known as the Other Dependent Credit or Family Tax Credit, is the new credit instituted by the Tax Cuts and Jobs Act. Prior to 2017, taxpayers were only able to claim the Child Tax Credit for each minor dependent, as long as they were 16 years or younger on the last day of the year.

While the Child Tax Credit is still available (and even expanded), the TCJA offers the Family Tax Credit for any dependents 17 years or older. The dependent can be a parent, sibling, cousin, or even someone not related, such as your daughter’s boyfriend who lives in your house. As long as the person satisfies each of the qualifying rules set in place by the Internal Revenue Service (IRS), you can claim the Non-Child Tax Credit.

As it currently exists, the nonrefundable credit is $500 per dependent. Unlike a deduction which lowers your taxable income, the tax credit is deducted from taxes owed.

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How do I claim my parent as a dependent?

The basic requirements for all dependents are as follows:

  • Must be a U.S. citizen, U.S. national, U.S. resident alien or resident of Canada or Mexico;
  • Is not claimed as a dependent by anyone else;
  • Does not file a tax return as married filing jointly (unless the return is filed solely to claim a tax refund of income tax withheld or estimated tax payments made);
  • Does not claim someone else as a dependent; and
  • Receives more than half of their support from you, the taxpayer.

In order to claim your parent, or other adult, as a dependent, additional stipulations are in place:

  • Their gross income cannot be greater than $4,200.
  • If the adult is not related to you in one of the ways listed by the IRS, they must live with you for the entire year.
  • You must pay for more than 50% of their annual living expenses. This includes lodging, food, clothes, medical and dental care, recreation, transportation and other needs.

Gross Income Test

To qualify as your dependent for the sake of the $500 tax credit, your parent – or other adult dependent – must pass a gross income test. As of 2019, the potential dependent must have $4,200 or less of gross income.

Gross income includes: wages, gross business income, *taxable Social Security, unemployment income, royalties, honoraria, severance, sheltered work shop pay, gains from the sale of assets, dividends, rental income, interest and taxable withdrawals from regular IRAs, 401(k)s and other retirement accounts.

*For the sake of the gross income test, ignore any tax-free Social Security benefits. However, you must account for those tax-free benefits when determining whether you pay for 50% of annual living expenses.

Gross income does not include: nontaxable pensions, part of the Social Security that is not taxable, nontaxable disability payments, Supplemental Security Income, public assistance, gifts and inheritances.

Relationship Rules

Importantly, you must have a qualifying relationship with the potential dependent. They must either 1) be related to the taxpayer, or 2) live as a member of the taxpayer’s household for the entire year.

Qualified related relationships (which do not require living together full time) include:

  • Child, stepchild, foster child or a descendant of any of them (if they are 17-years-old or greater)
  • Brother, sister, half-sibling or step-sibling
  • Father, mother, grandparent or other direct ancestor (not a foster parent)
  • Stepparent
  • Nephew or niece
  • Child of a half-sibling
  • Aunt or uncle
  • Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law

The relationships established through marriage do not end if there is a death or divorce.

In order to claim those un-related relationships which are not included on the list (i.e. a friend or “honorary aunt”), the individual must live with you all year long. However, the living arrangement cannot violate local laws. For example, if you are living with a significant other that meets all of the other requirements, but they are still married to someone else, that living situation may be illegal. Therefore, you could not claim that significant other as a dependent.

For additional help determining who you can claim as a dependent, use this interactive tool provided by the IRS.

Support Requirement

The final dependent requirement for your parents and other individuals over the age of 16 is the support requirement. IRS rules state that the filing taxpayer must provide over 50% of support to the individual’s living expenses.

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Can I claim my parent as a dependent if my other siblings contribute to our parent’s care?

When considering the support requirement, it is necessary to account for the financial support the potential dependent receives from others.

For example, you and your other siblings may all contribute to help cover your mother’s living costs. In order to claim your mother as your dependent, you must still contribute 51% or more to her living expenses unless your siblings sign a Multiple Support Agreement. The agreement states the consent of the other siblings to not claim your mother as a dependent. However, even with the agreement in place you must still contribute a minimum of 10% to your mother’s support.

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If I claim my parent as a dependent, am I eligible to file as head of household?

For unmarried individuals taking care of their mother or father (or other qualifying adult), the head of household (HOH) filing status is a significant tax advantage. Compared to single filers, HOH filers are entitled to wider tax brackets and greater standard deductions. This can lead to considerable tax savings.

Head of household status is available to taxpayers who satisfy certain criteria. HOH filers must file separate individual tax returns, be considered unmarried, and support a qualifying person (such as their parent) by paying for more than 50% of their living expenses and more than one-half of the cost to maintain the qualifying person’s home. There is no requirement that the taxpayer and qualifying parent must live in the same household. All other relatives must live with the taxpayer for at least half of the year in order for the taxpayer to reach HOH status.

An unmarried taxpayer must be single, divorced or considered unmarried. Married taxpayers are considered unmarried if they did not live with their spouse during the last six months of the tax year.

Note that Multiple Support Agreements disqualify you for HOH filing status.

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Can I deduct my parent’s medical expenses?

For 2019, you can claim an itemized deduction for medical expenses paid for you, your spouse and your dependents, to the extent that those expenses exceed 10% of your Adjusted Gross Income (AGI). AGI is comprised of all taxable income items. It is reduced by certain write-offs, such as deductible IRA contributions and alimony payments required by a pre-2019 divorce agreement.

Clearing the 10% AGI hurdle is tough. However, if you are paying considerable medical expenses for a dependent parent, it is less challenging. In order for your parent to qualify as a dependent for medical expenses, you must pay over half of your parent’s living expenses. Notably, the gross income test is not applicable in regards to medical expense deductions.

Note: To claim deductions for a dependent parent’s medical expenses, you must make direct payments to medical service providers. Reimbursing your parents for these expenses does not qualify.

For itemized medical expense deduction purposes, your dependent parent’s medical expenses may include (but are not limited to) the following:

  • Health insurance premiums
  • Out-of-pocket medical costs, such as insurance co-payments, 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 deductions, subject to age-based limits. For each covered person, count the lesser of: 1) the premiums paid, or 2) the applicable age-based limit. As of 2019, the age-based premium limits are:

For 2019, you can claim an itemized deduction for medical expenses paid for you, your spouse and your dependents, to the extent that those expenses exceed 10% of your Adjusted Gross Income (AGI). AGI is comprised of all taxable income items. It is reduced by certain write-offs, such as deductible IRA contributions and alimony payments required by a pre-2019 divorce agreement.

Clearing the 10% AGI hurdle is tough. However, if you are paying considerable medical expenses for a dependent parent, it is less challenging. In order for your parent to qualify as a dependent for medical expenses, you must pay over half of your parent’s living expenses. Notably, the gross income test is not applicable in regards to medical expense deductions.

Note: To claim deductions for a dependent parent’s medical expenses, you must make direct payments to medical service providers. Reimbursing your parents for these expenses does not qualify.

For itemized medical expense deduction purposes, your dependent parent’s medical expenses may include (but are not limited to) the following:

  • Health insurance premiums
  • Out-of-pocket medical costs, such as insurance co-payments, 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 deductions, subject to age-based limits. For each covered person, count the lesser of: 1) the premiums paid, or 2) the applicable age-based limit. As of 2019, the age-based premium limits are:

To determine whether you incurred sufficient medical expenses to claim an itemized deduction, add all of the qualifying medical expenses for you, your spouse and your dependents – including your parent, if applicable. Your total itemized deductions must exceed your allowable standard deduction to qualify.

For 2019, the following standard deduction amounts generally apply:

  • $12,200 for single filers
  • $18,350 for heads of households, and
  • $24,400 for married couples filing jointly

Itemized deductions are included on Schedule A (Form 1040), “Itemized Deductions”.

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What else can I do?

For the most intricate details regarding how the IRS qualified dependents, they offer a “Dependents” guide. For matters relating specifically to parent dependents, they published an FAQ.

However, the best action you can take is to reach out to us. Our experienced professional staff is here to help you maximize your tax savings.

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Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.