RETIREMENT SECRETS: Tax Strategies for Caring for an Aging Parent

By KARL KIM, CFP, CLTC

Caring for an aging parent is difficult physically, emotionally and financially. To help ease the financial burden, there are little-known tax deductions and tax credits available.

One often overlooked strategy is to claim your parent as a dependent. This deduction will help to reduce your taxable income by $4,000 for 2015.

To qualify for this exemption and claim your parent as a dependent, there are five tests that have to be met.

The first is that a dependent has to be related to you. This could be your father, mother, stepfather, stepmother, father-in-law or mother-in-law. They do not have to live with you.

Second, your parent must also be a U.S. citizen, U.S. resident alien, U.S. national or a resident of Canada or Mexico.

Third, your parent’s gross income for 2015 must be less than $4,000. Gross income does not include Social Security or tax-free income. Don’t worry, there are other strategies if your parent doesn’t meet the income requirement.

Fourth, if married, they cannot file a joint tax return with their spouse unless it is only to claim a refund.

Fifth, you must provide more than half of your parent’s total support for 2015. Expenses may include food, housing, clothing, medical and dental care, recreation, transportation and other necessities.

Once your parent qualifies for the dependent exemption, you can also add their medical expenses that you have paid for to yours and deduct them if they exceed 7.5 percent of your adjusted gross income (AGI) if you are 65 or older and 10 percent if you are younger than 65.

Long-term care costs including room and board and other personal costs can be deducted as medical expenses if the person is chronically ill.

This means that the person must be unable to perform without substantial assistance at least two activities of daily living, including eating, bathing, dressing, bathing, transferring and continence, for at least 90 days, or have substantial cognitive impairment.

You may also qualify for the Elderly Dependent Care Credit. It is a tax credit for you paying for a caregiver or adult day care for your parent while you work.

What if your parent doesn’t meet the income or other requirements to be claimed as a dependent for exemption purposes?

If your parent doesn’t meet the less-than-$4,000 income requirement to be claimed as a dependent, the good news is that they could still be counted as a dependent for medical expense purposes only.

Only two requirements have to be met for this to occur. The first is that your parent be a qualifying relative. The second is that they must be a U.S. citizen or national or a resident of the United States, Canada or Mexico.

Examples of deductible medical expenses include:

1. Prescribed medicines and drugs. Insulin without a prescription is deductible.

2. Home care. Only the part of home care services that is classified as nursing services is deductible. The services do not have to be done by a nurse as long as they are the kinds of services that a nurse would do. For example, giving medication, changing dressings, bathing and grooming.

3. Long-term care costs as previously described.

4. Funds spent to improve the home for the parent with disabilities. This may include entrance or exit ramps, widening doorways, installing rails in the bathroom, modifying stairways, lifts, and hardware for doors, drawers and cabinets.

5. Chiropractor fees

6. Dental services, including teeth cleaning, X-rays, fillings, extractions and dentures.

7. Eyeglasses and contact lenses

8. Premiums for insurance that cover medical care including Medicare Part B.

9. Long-term care services that are needed for a chronically ill person and prescribed under a plan of care by a licensed health care professional. This may include care received at an assisted living facility, board and care or a nursing home.

10. Therapy received as a medical treatment.

Remember that in order for these expenses to be deductible they must exceed 7.5 percent of your adjusted gross income if you are 65 years or older or 10 percent of your adjusted gross income if you are younger than 65. You must also pay for more than half of your parent’s living expenses.

Tax savings are just one of the many benefits to planning for current and future long-term care costs. The tax strategies are best implemented in conjunction with pre-planning for Medi-Cal. This planning should be done only with a Certified Financial Planner™ that is knowledgeable about Medi-Cal.

For more information, go to www.IRS.gov and download Publication 501 for dependent information and Publication 502 for medical expense information.

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Karl Kim, CFP, CLTC is the president of Retirement Planning Advisors, Inc., RPA Tax Group, LLC and a Medi-Cal specialist. He is the author of “Don’t Go Broke Paying the Nursing Home,” available on Amazon. His office is located in La Mirada. He can be reached at (714) 994-0599 or at www.MyPostRetirementPlan.com. He has submitted over 1,000 Medi-Cal applications over the past 20 years with a 99.9 percent success rate. This is meant to be an educational article. Do not make any decisions solely on the information in this article. Consult your tax advisor, attorney or financial advisor before taking any action.