Adults caring for aging parents while raising children or supporting a grown child are often referred to as the sandwich generation. The Tax Cuts and Jobs Act changed the options available to those in the middle of the sandwich, but the good news is that there are still tax benefits available to those caring for young children, elderly parents, or other dependents.
Loss of the Personal Exemption
A not very well advertised but substantial change to the tax code is the loss of the personal exemption. For a couple with one child, the increase in the standard deduction offsets the loss of exemptions, assuming they would have taken the standard deduction and not itemized. For a couple with more than one dependent, the change has a negative impact. For a family in the 25 percent tax bracket, each exemption was worth around $1,000 in tax savings.
The increase in the child tax credit from $1,000 to $2,000 for qualifying dependent children mitigates the loss of exemption for those who qualify. The income limitation for the child tax credit was also increased so more middle-class families can take the credit. A new credit for other non-child dependents has been added at a lower amount of $500 per dependent, partially replacing the lost exemption. The definition of a dependent has remained the same.
To qualify to claim an adult as a dependent, you must provide half of that person’s support, and unless disabled, that person must make less than the exemption amount would have been, around $4,100, not including Social Security income. If the dependent resides in your home, then the fair rental value of their part of the home is considered part of the support you provide. If several people collectively contribute over 50 percent of that person’s support, then you have to decide which one of you will claim the exemption.
Child or Dependent Care Expenses
The credit for child care or dependent care expenses has not changed with the new law. This can help offset the expenses involved in paying for care for a loved one, subject to limitations for each child or dependent. If you itemize, you can also claim an itemized deduction for medical expenses paid for your adult dependent if the total for the family is over the 7.5 percent of adjusted gross income threshold.
The rules for dependency of full time students between ages 19 and 23 have not changed. That means they can earn more than $4,100 in the year, but still be your dependent as long as they attend school full time for at least five months of the year. While you can no longer claim an exemption for them, you can include their expenses, such as medical expenses, in your deductions.
If you can claim a grandchild as your dependent, the grandchild is your qualifying child. If the grandchild is under age 17, you could qualify for the child tax credit for your grandchild, at the increased level of $2,000. The qualifying child rules also apply to nieces and nephews, and their descendants, who are your dependents.
Filing as Head of Household
If you are single and providing a home for a qualifying dependent, who can be your child or another relative, you can still take advantage of a better rate structure by filing as head of household. If the relative is your parent, he or she does not have to live in the same house with you, although any other relative would have to live in your house for you to claim head of household status. In either case, you have to pay more than half of the maintenance costs for your home.
Gift Rules Related to Medical or Educational Expenses
The gift rules regarding payments of medical or educational expenses directly to the service providers also have not changed. Those gifts are not reportable whether or not the recipient of the services is your dependent, even if the amount is over the annual gift tax exclusion amount, which has now indexed up to $15,000. The payment must be made directly to the provider, not as a reimbursement to the donee. Paying medical or educational expenses is still a great way to provide some meaningful assistance to family and friends.
While the options have changed somewhat, there are still tax benefits available to help with the financial responsibility of caring for children and parents. When meeting with your tax advisor, make sure to update them on changes in the family, so they can help you avoid getting caught in the middle.