THE BASICS OF MONEY
HOW TO INVEST, MANAGE YOUR MONEY AND SPEND WISELY
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Your parents may reach a point when they're unable to live alone without financial assistance from you. Some of the expenses you incur to help support your parents may generate tax benefits.
If you provide most of a parent's support, you can deduct some of the cost on your tax return, provided the parent qualifies as your dependent. That means their taxable income must not exceed a certain amount and you must pay for more than half of the parent's living expenses. If you also pay for medical expenses, you can add the cost to the amount you paid for the rest of the family and deduct the amount that exceeds 7.5% of your adjusted gross income.
If you pay for care for your parents, you can claim a federal tax credit depending on your income and how much you spent on care during the year. To qualify for this credit, you must pay for over half of your parent's expenses, but there is no limit to the income your parent can earn.
Or you can pay for dependent care with pretax dollars up to defined limits if you participate in your employer's flexible spending plan. Your employer deducts the money from your paycheck before taxes are applied, then as you submit vouchers for qualified dependent care expenses, you get your money back.
You must choose between the tax credit and the flexible-spending account; you can't use both. Generally, however, if you spend more than $2,400 and you are in the 25% tax bracket or above, the flexible-spending account is the better deal.
If you share the costs of caring for your parent with your siblings and together you contribute more than half of your parent's total support, then one of you can claim a dependency deduction, provided the income test is met. Each sibling must pay for more than 10% of the parent's support, and each must sign IRS Form 2120 (Multiple Support Declaration), which you submit with your 1040.
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