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Tax
aspects of caring for an elderly individual
The purpose of
this letter is to discuss the tax aspects of taking on the care
of an elderly or incapacitated individual.
1. Dependency
exemption. You may be able to claim the cared-for individual
as your dependent, thus qualifying for an exemption. To qualify,
(a) you must provide more than 50% of the individual's support
costs, (b) he must either live with you or be related, (c) he
must not have gross income in excess of the exemption amount ($2,750
for 1999), (d) he must not himself file a joint return for the
year, and (e) he must be a U.S. citizen or a resident of the U.S.,
Canada, or Mexico. If the support test ((a), above) can only be
met by a group (several children, for example, combining to support
a parent), a 'multiple support' form can be filed to grant one
of the group the exemption, subject to certain conditions.
2. Medical
expenses. If the individual qualifies as your dependent, you
can include any medical expenses you incur for him along with
your own when determining your medical deduction. If he doesn't
qualify as your dependent only because of the gross income or
joint return test ((c) and (d), above), you can still include
these medical costs with your own. The costs of qualified long-term
care services required by a chronically ill individual and eligible
long-term care insurance premiums are included in the definition
of deductible medical expenses. There's an annual cap on the amount
of premiums that can be deducted. The cap is based on age, going
as high as $2,660 (in 1999) for an individual over 70.
3. Filing
status. If you aren't married, you may qualify for 'head of
household' status by virtue of the individual you're caring for.
If the person you're caring for (a) lives in your household, (b)
you cover more than half the household costs, (c) he qualifies
as your dependent, and (d) he is a relative, you can claim head
of household filing status. If the person you're caring for is
your parent, he need not live with you, as long as you provide
more than half of his household costs and he qualifies as your
dependent.
4. Dependent
care credit. If the cared-for individual qualifies as your
dependent, lives with you, and physically or mentally cannot take
care of himself, you may qualify for the dependent care credit
for costs you incur for his care to enable you and your spouse
to go to work.
5. Exclusion
for payments under life insurance contracts. Any lifetime
payments received under a life insurance contract on the life
of a person who is either terminally or chronically ill are excluded
from gross income. A similar exclusion applies to the sale or
assignment of a life insurance contract to a person who regularly
buys or takes assignments of such contracts and meets other qualifying
standards.
If you think
your situation qualifies you for any of the above tax benefits,
or you wish to discuss your situation further, please consult
with a tax advisor for proper planning and implementation of tax
savings ideas.
C.
David Pitzer, CPA, PC
118
Two Mile Pike
Goodlettsville, TN 37072
(615) 851-2727
Fax: (615) 851-8711
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