Tax help in caring for your aging parents
Millions of adult children find themselves looking
after aging parents. Tax laws offer some help, as long as you and your
parents meet the criteria.
The key to Internal Revenue assistance in caring for
an elderly relative is whether you can claim the your parent 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. If you and your parent
meet IRS requirements, you'll be able to claim an added personal
exemption on your income tax return. For 2009 returns, such exemption
allows you to reduce your taxable income by. $3,500.
But to claim this tax break, you must pass
the following two tests:
-
Income. To qualify as a dependent, your
parent's income can't exceed the amount of the personal exemption. For
2009, the cut-off is $3,500. In most instances, Social Security
benefits aren't counted. But if your parent receives more than $3,500
from other sources, such as pension benefits, interest and dividends
from investments, or withdrawals from retirement savings plans, you
can't claim them as a dependent. The income requirement prevents most taxpayers from claiming
a parent as a dependent, because even a small pension will make the
parent ineligible.
-
Support. In addition to the income
test, you must provide more than half a parent's costs for food,
housing, medical care, transportation and other necessities. Even if all
your parent's income is from Social Security, you can't claim them as a
dependent unless you pay more than half their living expenses.
Your parent doesn't have to live with you to
qualify as a dependent, as long as they meet the income test and you
provide more than half of the financial support. If your parent lives with you, you can include a percentage of your
mortgage, utilities and other expenses in calculating how much you
contribute to their support.
Making the most of the Dependency Exemption
The
dependent's own funds are not considered support unless they
are actually used for support. For example, let's suppose
that, over the course of the year, your mother receives $4,800
in Social Security and $200 in interest. Of this $5,000, she
spends $4,000 for her support and saves the remaining $1,000.
If you spend more than $4,000 for her support, you can claim
her as a dependent even though she contributed more money.
Unless
you specify otherwise, the IRS routinely allocates your contribution
of support equally between both parents. If you provide less
than half of the total support for both parents, you might
consider supporting only one of them, the one with less income.
By making your check payable only to that parent, you may
become eligible to claim at least one parent as a dependent.
Finally,
to protect your dependency exemption, add up the numbers well
before the end of the year. That way, if you discover you're
short of providing more than half of your parent's support,
you may be able to claim the exemption by spending an additional
sum before year end.
You can find a support worksheet in: IRS Publication 501: Exemptions, Standard Deduction, and Filing Information (pdf).
Qualifying for the Dependent Care Credit
A
dependent care tax credit is available for individuals who,
in order to be able to work, pay someone to care for a mentally
or physically disabled parent. The credit is a percentage,
based on your AGI, of the amount of dependent care expenses
you pay. Expenses for care of a disabled dependent also may
qualify for a medical deduction. You must choose to take either
the itemized deduction or the dependent care credit, but not
both.
What about Deducting Medical Expenses ?
Even if you can't claim your mom as a dependent,
you may still get a tax break for helping pay their medical costs. The
IRS lets taxpayers deduct money spent on a parent's health care, even
if the parent doesn't qualify as a dependent. To claim this deduction,you still must provide more than half your parent's support, but your parent doesn't have to meet the income test.
The deduction is limited to medical expenses
that exceed 7.5% of your adjusted gross income. You can include your
own unreimbursed medical expenses in calculating the total.
Most taxpayers don't have enough medical
expenses to clear the 7.5% threshold. But if you're paying thousands of
dollars a month for a parent's nursing home care, you might not have
trouble overcoming that hurdle (see box at the left).
Children who pay for a parent's care in an
assisted-living facility could also qualify for a deduction. Most
administrators of these facilities will break out how much of the
monthly payment goes toward medical services, as opposed to food and
other amenities. The portion that goes toward medical care is
deductible, once your total medical expenses exceed 7.5%
of your adjusted gross income.
Paying for Long-Term Care
It is important to understand the different types of insurance that
are available to older people. Many people believe that Medicare will
cover long-term care needs. Medicare will NOT cover long-term care needs.
MEDICARE - Medicare is a Federal health insurance program which helps defray
many of the medical expenses of most Americans over the age of 65.
Medicare has two parts:
(Part A) Hospital Insurance helps pay the cost of
inpatient hospital care. The number of days in the hospital paid for by
Medicare is governed by a system based upon patient diagnosis and
medical necessity for hospital care. Once it is no longer medically
necessary for the person to remain in the hospital, the physician will
begin the discharge process. If the person or the family disagrees with
this decision, they may appeal to the state's Peer Review Organization.
Medicare does not pay for custodial care or nursing home
care. It will, however,cover up to 60 days in a nursing home as part
of convalescence after hospitalization.
(Part B) Medical Insurance pays for many medically necessary
doctors' services, outpatient services, and some other medical
services. Enrollees pay a monthly premium.
MEDICAID
Medicaid is a joint federal-state health care program for people
with a low income. The program is administered by each state and the
type of services covered differs. There are strict income requirements
so it is necessary for the person to "spend down" all income and assets
to poverty levels before becoming eligible. Medicaid is the major payer
of nursing home care.
The Medicaid requirement to "spend down" all income and assets
created a great hardship for the spouse of a person needing nursing
home care. Changes in the Medicaid rules now allow the spouse to keep a
monthly income and some assets, including the primary residence. The
amounts allowed change, so you must check for current levels.
OTHER INSURANCE
Why buy other insurance? The purchase of additional insurance gives
the policy holder access to a greater choice of facilities without
dipping into additional financial resources.
- Medigap is the
name given to privately-purchased supplemental health insurance. It is
designed to help cover some of the gaps in Medicare coverage but does
not cover long-term care. Study Medigap policies carefully to be sure
they provide the protection needed and do not duplicate other health
insurance.
- Long-Term Care Insurance is a private insurance that is
usually either an indemnity policy or part of an individual life
insurance policy. An indemnity policy pays a set amount per day for
nursing home or home health care. Under the life insurance policy, a
certain percentage of the death benefit is paid for each month the
policyholder requires long-term care. Policies are priced differently
depending on the age of the policyholder, the deductible periods
chosen, and indemnity value or duration of benefits.
- Services Offered by the Private Sector - Some private companies have set up programs to help their employees
with eldercare. Both spouses should investigate their eldercare options offered by their employers.
These programs can include seed money for eldercare services, flexible
work schedules for caregivers, subsidies for eldercare expenses, unpaid
leave for up to a year, referral services, inter-generational day care
centers (for both the elderly and children), geriatric assessment and
case management, and group rates for long-term care insurance.
Information about other long-term insurance policies are available from Private Geriatric Care Managers who are are professional social workers and
nurses who assist the elderly and their families by assessing need,
coordinating services, and monitoring care for a fee. They are
particularly helpful when long-distance care giving is necessary. Fees
vary and are sometimes covered by Medicare or private insurance. If the older person has been
hospitalized, hospital discharge planners can also provide information
and referrals for after-care.
Legal Issues
If an elderly relative becomes mentally incapacitated, it is
necessary that someone step in to take care of affairs. Advance
planning on the part of both the elderly person and those who care
about him/her will facilitate this process. You should consult an
attorney before taking any of the following steps.
The Document Locator (scroll to bottom of page) is a useful
tool for the elderly person and his/her relatives to make contingency
plans for future care. Other factors to consider include setting up
joint bank or property accounts and signing a durable power of
attorney.
Joint property or bank accounts are the simplest way to
ensure that someone will be able to handle the elderly person's affairs
if s/he becomes incompetent. There are, however, serious financial and
tax consequences to such an arrangement. For example, when applying for
Medicaid assistance, the assets of both owners are taken into account
to determine eligibility. No one should enter into such an arrangement
without checking all the legal implications.
A durable power of attorney is important because an
ordinary power of attorney is not valid if the principal becomes
incapacitated. This can create serious problems for the person handling
the affairs and arranging care. A durable power of attorney is designed
to survive disability or incompetence and is an important alternative
to guardianship, conservatorship, or trusteeship. Laws vary from state
to state so it is important that a durable power of attorney be drawn
up by an attorney licensed to practice in the state in which the client
resides.
Guardianship or conservatorship is the legal
mechanism by which a court declares a person incompetent and appoints a
guardian. The court transfers the responsibility for managing financial
affairs, living arrangements, and medical decisions to the guardian.
This procedure can take some time, usually when time is of the essence.
It is recommended that a lawyer draw up any durable power of
attorney and/or health care power of attorney so that the document
meets your special needs and will be acceptable in your state. This is
especially important in any state which does not have a statutory form.
The Society for the Right to Die provides free information on your
state's current laws on both living wills and powers of attorney for
health care. The National Academy of Elder Law Attorneys can provide
information on how to chose an attorney specializing in elder law.
Other referral sources include the local Office on Aging or the local
Alzheimer's Association. See Eldercare Resources below for the
addresses and telephone numbers of these organizations.
Useful Eldercare Resources:
Adult Day Services Network of Contra Costa. Nonprofit
organization in Contra Costa who can assist you in finding a day program or other community service. They have 15 locations in Contra Costa. You can find them at Adult Day Services Network of Contra Costa.
AARP Webplace - This advertisement-free site provides information and encourages elder advocacy. http://www.aarp.com
Aging Parents: The Family Survival Guide
Consisting
of a booklet and two videotapes, this guide is designed to help family
members respond to eldercare crises and to plan ahead for long-term
care giving. To order, call 1-888-777-5585 or order online at http://www.agingparents.com
Aging Parents and Elder Care - Articles,
comprehensive checklists, and links to key resources. The site is
designed to make it easier for family caregivers to quickly find the
information they need. http://www.aging-parents-and-elder-care.com/
ElderWeb: An Online Eldercare Sourcebook
Designed
to assist older Americans, professionals and family members, this web
site covers eldercare and related issues with an extensive array of
links. http://www.elderweb.com
Academy of Elder Law Attorneys
1604 North Country Club Road
Tucson, AZ 85716
Tel: 520-881-4005
Fax: 520-325-7925
http://www.naela.org
Alzheimer's Association, Inc.
919 North Michigan Avenue, Suite 1000
Chicago IL 60611
Tel: 1-800-272-3900
http://www.alz.org
American Association of Homes for the Aging
901 E Street NW
Washington, DC 20004
Tel: 202-783-2242
Fax: 202-783-2255
http://www.aahsa.org
American Association of Retired Persons
601 E Street NW
Washington, DC 20049
Tel: 202-434-2277
http://www.aarp.org
Provides the following free pamphlets: Miles Away and Still Caring (D-12748); A Handbook About Care in the Home (D-955); A Path For Caregivers (D-12957)
National Association of Private Geriatric Care Managers
1604 North Country Club Road
Tucson, AZ 85715
Tel: 520-881-8008
Fax: 520-325-7925
http://www.caremanager.org
Provides free referrals nationwide and sells a directory of members and managers.
National Council on the Aging, Inc.
409 3rd Street SW
Washington, DC 20061-5087
Tel: 202-479-1200
http://www.ncoa.org
Publishes Perspective on Aging, a bimonthly magazine, and Family Home Caring Guides.
National Institute on Aging
9000 Rockville Pike
Bethesda, MD 20892
Tel: 301-496-1752
Web site: http://www.aoa.dhhs.gov
National Guardianship Association
1604 N. Country Club Rd
Tucson, AZ 85716
Tel: 520-881-6561
http://www.guardianship.org
Long-Term Care Link
A comprehensive web site with links to
eldercare services and insurance information. Updated web site
addresses for all State Agencies on Aging:
http://www.longtermcarelink.net/state_programs3.html
For general resource information: http://www.longtermcarelink.net/index.html
