If you have cared for an elderly relative, they may be considered dependent, which entitles you to additional tax benefits.
The first thing that usually comes to mind when considering dependents is the relationship between parents and children, but if you have cared for an elderly relative, they may be considered your dependent, resulting in additional tax benefits for you. Once you determine that you both meet the IRS criteria, you can claim your parents as a dependent on your tax return.
Income limitation
Your parent must first meet the income requirements set by the Internal Revenue Service to be claimed as a dependent. To be considered a dependent,
Your parent must not have received or earned more than the gross income test limit for the fiscal year.
This earned amount is determined by the IRS and may vary on a yearly basis.
The gross income limit for the 2020 and 2021 fiscal years is $4,300.
In general, social security income does not matter, but there are exceptions. If your parent has other interest or dividend income, certain social security rights may also be imposed.
Support requirement
You must have paid more than half of your parents' family allowances to claim them as dependents during the financial year. The amount of support provided must also exceed your parent's income by at least one dollar.
To determine the monetary value of the amount of support granted, several factors must be taken into account:
Calculate the FMV (fair market value) of the room your parent occupies in your house. Consider how much rent a tenant might be charged for this space.
Consider the cost of the food you provide.
Remember to include medical bills, utilities, and general living expenses that you are also paying.
Compare the cost of support you provide with any income, including Social Security your parent receives to determine if you meet the support requirement.
Deduct medical expenses
Suppose you paid for your parents' health care. In that case, you could claim itemized medical bills in Schedule A. Itemized deductions are beneficial when they exceed the amount of standard deduction you can claim.
You can deduct your parents' medical expenses, even if they do not meet the income conditions to be claimed as your dependent, provided you provide more than half of your support.
Your total medical expenses, including all expenses for prescription drugs, equipment, hospital care, and medical visits, must exceed 7.5% of the adjusted gross income to deduct these expenses in 2020 and 2021.
Dependent care credit
For the 2020 fiscal year, the Child Care and Dependent Credit is a non-refundable tax credit. The Child Care and Dependent Credit can be claimed by taxpayers who pay for the assistance of a qualified person and who meet certain other requirements.
If you are married but file a separate income tax return for your spouse, you cannot apply for this credit.
If your parents cannot take care of themselves physically or mentally, they are qualified individuals.
You must be able to correctly identify your care provider. This includes providing the supplier's name, address, and identification number (social security number or employer identification number).
You must have earned income and work-related expenses. This means that the service must have been provided while you were working or looking for a job.
For 2021, the American Rescue Plan makes important changes to how much and how you can apply for child care and dependents credit. The plan increases the number of expenses eligible for the credit, improves credit reduction based on income levels, and also pays it back in full. This signifies that, unlike other years, you can get loans even if you don't owe taxes.
Thus, for the fiscal year 2021 (taxes declared in 2022):
The amount of eligible expenses increases from $3,000 to $8,000 for one eligible person and from $6,000 to $16,000 for two or more eligible persons.
The percentage of qualified expenses eligible for the credit goes from 35% to 50%.
The start of the credit reduction went from $15,000 to $125,000 of Adjusted Gross Income (AGI).
Also, for the fiscal year 2021, the maximum amount that can be paid into a flexible child care expense account for dependent care and the tax-free care amount provided by the employer goes from $5,000 to $10,500.
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