Having a parent live with you will affect all aspects of your life, from your time to your finances.
One important factor that most people ignore is the potential tax implications.
You may be able to claim your parents as dependents, which enables you to get more money back on your federal tax return every year. You can receive tax credits and deductions for medical expenses and any home improvements you make to accommodate your parents.
Understanding these implications is essential to maximize your tax benefits while caring for your parents.
Key Takeaways
Claiming your parent as a dependent is the first step in maximizing the money you receive on your federal tax returns.
You can qualify for a significant tax reduction if your parent’s medical expenses exceed 7.5% of your adjusted gross income.
You can count any home improvements you make to accommodate your parent’s medical needs towards medical expenses.
What Are the Tax Implications of Parents Living With You?
Having a parent move in is a different story for everyone.
Some parents may pay rent and contribute some of their savings for their care, while others can’t. Whatever your situation, it is essential to know the tax implications to prepare for your next filing.
In some cases, you may be able to claim your parent(s) as a dependent on your taxes. When filing for your tax returns, the IRS will give you more money back to help support your dependent(s).
Your parent’s medical expenses, such as medicine, doctor fees, and general living expenses like food and utilities, will add up quickly, and receiving this tax refund can reduce your burden.
The key to receiving this tax refund is knowing whether you can claim your parent as a dependent, which I’ll cover next.
Claim Your Parent as a Dependent on Your Tax Return
The first and most important implication is that you can claim your parent as a dependent on your tax return. However, there are several requirements you must meet for this to be possible.
Most of these requirements depend on your parent's income, status, and your contributions to their care. Claiming your parent as a dependent can mean you get more out of your tax returns, which can be a great financial help.
What Are the Requirements for Claiming a Parent as a Dependent?
The specific criteria for you to be able to claim your parent are:
Your parent is a U.S. citizen.
Their income is less than $4,400 a year.
You paid for at least half of total support for your parent.
They do not file their taxes jointly with anybody else.
To prove you have provided more than half of the total support for your parent, you must carefully calculate your total contributions compared to the total of all other sources of income your parent has received. Their contribution includes money from taxable and non-taxable income and any loans.
Your contributions to your parent’s support include food, lodging, transportation, clothes, education, medical or dental care costs, and recreation.
Add up these costs and compare the total to the total your parent has spent on themselves. You clear this requirement if you have paid more than 50% of the expenses. You can see what not to include in calculating your parent’s total support here.
For example, if your parent receives $3,000 in social security benefits and spends $1500 on lodging and recreation. You pay $1000 for your parent’s prescriptions and dental work throughout the year. You also calculate you have spent $300 on your parent’s share of food and another $300 for their share of transportation.
In this example, you have contributed $1,600 for your parent’s support while they have contributed $1500. The total spent on their support is $3,100, of which you have contributed more than 50%, so you would clear the support test.
There are some minor qualifications that you should pay attention to as well.
You, yourself, must not be a dependent; and,
Your parent cannot be a dependent of anybody else.
There is also the relation to the parent. Parents and step-parents are accepted, but foster parents must have lived with you for at least a year.
If you clear these requirements, you will receive the returns from your parent’s dependency.
What Tax Benefits Can I Receive if I Claim My Parent as a Dependent?
After claiming your parent as a dependent, you can claim several tax benefits on your tax return.
The possible benefits you can receive are broken down into three categories of credits.
The first benefit is the tax credit you can receive by successfully claiming your parent as a dependent.
You can receive up to $500 on your federal tax return by meeting all the requirements listed above.
The next benefit is the child/dependent care credit.
Most people think this benefit is exclusive to only caring for children, but your parent can also qualify.
If your parent cannot take care of themselves and you have hired extra help, you are eligible. With this credit, you can receive up to $3000 per parent/dependent.
Flexible spending account from an employer
The final benefit you might be able to receive is through your employer.
If your employer offers a dependent flexible spending account, they will send money deducted from your income to this account.
The IRS allows up to $10,500 of your income, not subject to taxation, to be sent to this account.
Tax Deductions or Credits Available for Medical Expenses Incurred by Your Parent
As you become responsible for caring for your parent, the largest expense will likely be to cover their medical needs.
Prescriptions and hospital/doctor bills can add up quickly, and you will probably feel this hit to your finances.
However, the IRS allows you to receive a significant tax deduction for these costs. You qualify for this deduction if the amount you spent on your parent’s medical expenses exceeds 7.5% of your adjusted gross income.
For example, if your adjusted gross income is $5,000 and you spent $500 on medical expenses that year, then 7.5% of your adjusted gross income equals $375.
Because you spent more than 7.5% of your income on medical expenses, you are eligible to receive the money that you spent that is more than the 7.5%.
In this example, $500 minus $375 is $125, so you are eligible for a $125 deduction.
Check out the full list of IRS-approved medical expenses.
Note:
You can not include non-prescription drugs, toiletries, funeral/burial expenses, or cosmetic surgery as medical expenses.
You also can not include any medical expenses that were paid back to you, such as bills covered by insurance. All medical expenses must be paid within the tax year to qualify.
Do You Have to Report Your Parent’s Rent as Rental Income?
If your parent pays you rent for living with you, you do have to report it as rental income on your tax return. This is because even though you are renting to your family member, you are receiving money for renting a property you own.
You can deduct any money you spend on depreciation, maintenance, interest, utilities, and insurance from your rental income.
To receive these deductions, you must prove that the rent you charge your relative is fair market price. Your parent must pay you less than what you spend on the portion of your property you rent to them.
If you charge too little rent to your parent, the IRS may consider it a gift.
On the other hand, charging too much can also affect your parent’s ability to receive Social Security benefits, which may go to help cover their living expenses.
This process is a balancing act of proving to the IRS that the portion of your home you rent to your parent costs you more than they are paying you in rent.
To ensure you are not negating the benefits listed above, ensure that your parent is not paying rent that, including other expenses, surpasses 50% of their total support.
Tax implications if You Make Home Improvements to Accommodate Your Parent's Living Needs
If you have made any improvements to your home for your parent(s) for medical reasons, you may be able to receive a tax deduction. These improvements can include ramps, stair lifts, and shortened/altered railings, just to name a few.
In general, home improvements are not tax deductible. However, if done to accommodate for you or anybody living with you (family and dependents included), you can include the cost of the improvement in your medical expenses.
Any capital improvements you want to claim as medical expenses must be proven as necessary for your parent(s). No matter how small of a cost, even $50 for new smoke alarms, as long the improvement is for medical reasons, it can count towards your medical expenses.
Improvements that are not considered medical expenses are for purely aesthetic purposes or that upgrade the value of your home. These may include new furniture, appliances, or room renovations.
You can only include the entire cost of improvements as medical expenses if they do not add value to your home. If they do increase the value of your home, you must decrease the amount that the value increases from the expense.
As I mentioned, if your medical expenses for you or a dependent exceed 7.5% of your adjusted gross income, you can qualify for a tax deduction from the IRS. This implication is important to note and remember when calculating your total medical expenses for the year.
How Can I Ensure I Maximize My Tax Benefits While Supporting My Parent's Living Needs?
Work on changing their status to dependent for your tax filings.
Once that is complete, the next step is to keep close track of your expenses. This should include all the money you put towards your parent’s care, including medical bills, additional help you hired, food, lodging, transportation, clothes, education, and recreation.
Having records of these expenses is how you prove your share of your parent’s support and how you will differentiate medical and non-medical costs. You want to have exact numbers to ensure you don’t miss a penny of your possible return.
A great way to keep close track of your and all of your family’s expenses together is Trustworthy.
Trustworthy will organize your information to be easily found and accessed anytime. You can also share information with professionals, like tax experts and lawyers, to make collaboration and planning more effortless than ever.
We also highly recommend hiring a tax expert to help you with many of the detailed requirements mentioned in this article. An expert can assist you in creating a yearly tax plan and ensure you file your taxes correctly and effectively.
While living with your parent, you can take advantage of your time with them and plan for the future. Estate planning is a challenging conversation, but it is necessary.
We’d love to hear from you! Feel free to email us with any questions, comments, or suggestions for future article topics.
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