They call us the Sandwich Generation, the middle layer between grown or growing children who depend on us and parents who also depend on us. Being in this position can sap a family’s resources physically, emotionally, and, of course, financially.
Fortunately, if you are providing for an elderly parent or other family member, there are some potential tax breaks available to help ease the burden. First of all, there is the dependency exemption, allowing a deduction of up to $4,050 per dependent. For a family in the 25% tax bracket, that translates to a savings of just over $1,000.
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 ($4,050 for 2016) not including social security income. If he or she resides in your home, then the fair rental value of their part of the home is considered to be part of the support you provide. If several people contribute over 50%, then you have to decide between you which one will claim the exemption.
If you must pay for care for your adult dependent in order to work, such as adult day care for an Alzheimer’s patient, then you might qualify for the dependent care credit. This can help to offset the expenses involved in paying for care for a loved one. The credit is the same as the child care expense credit but for other dependents, and subject to limitations for each child or dependent.
If you are supporting a student, you could qualify for some very nice educational credits if that person is your dependent. There is an exception to the income rule for full time students between ages 19 and 23. That means that they can earn over $4,050 in the year, but still be your dependent. As long as they attend full time for at least five months of the year.
Another consideration for the sandwich generation is the rising trend of young adult children returning home, sometimes with their own children to raise. If you can claim a grandchild as your dependent, there are some additional tax breaks available. A grandchild is considered to be a qualifying child, with the same age rules as your child. Depending upon your income level you could qualify for the child tax credit for your grandchild, a potentially refundable credit of up to $1000.
If you are single and providing a home for a qualifying dependent, who can be your child or a relative, you can also 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 another relative would have to live in your house. In either case you have to pay more than half of the maintenance costs for your home.
Also remember that paying medical or educational expenses directly to the service providers, whether the recipient of the services is your dependent or not, is not a reportable gift for gift tax purposes, even if the amount is over the annual gift tax exclusion amount (currently $14,000 per donor, per donee). The payment has to be directly to the provider and can’t be a reimbursement to the donee. Paying medical or educational expenses is a great way to provide some meaningful assistance to family and friends.
So this year as you bring in your tax documents and tell us about your financial activity for the year, let us know how the family is doing as well. We’ll look into all of the tax breaks that are available and help you make the best use of them to defray some of those extra expenses of providing for your family.