Q. My mother-in-law lives with my wife and me and we pay most of the cost for her caregiver, as well as providing free room and board. Can we declare her as a dependent on our tax returns?
A. You may very well be able to do so. Actually there are several ways in which expenses associated with the care of a parent may result in a tax benefit to you:
1) Declare A Parent As A Dependent: You will be able to claim your parent as a dependent for income tax purposes if you meet the following five tests set out by the IRS: (1) your parent must be related to you (Note: in-laws and stepparents are allowed); (2) she must be a citizen or resident of the United States, or of Canada or Mexico; (3) she must not file a joint return with any other person (although exceptions apply); (4) her gross annual income must be less than $4,000 (for 2015). NOTE: Social Security income is generally not counted if less than $25,000 for the year; and (5) you must provide more than half of her support for that calendar year. In determining the amount you pay in support, you are allowed to include the value of the free room and board you provide her. If you qualify, claiming your mother-in-law as a dependent would result in a $4,000 exemption on your tax return. See IRS Publication 501.
If you and your siblings jointly contribute more than one-half of her support, then you would be able to claim your pro-rata share if all of you sign a Multiple Support Declaration (IRS Form 2021). See IRS Publication 502.
2) Claim Deductible Medical Expenses: If you cannot claim your mother-in-law as a dependent because, for example, she had gross countable income above $4,000 for the year, you may still be able to deduct her care expenses as an itemized deduction on your Schedule A. To do this, you still must have provided more than one half of her support for the calendar year, but you need not worry about the income test. However, in order to reap the benefit of this deduction, your total itemized expenses must normally be greater than 10% of your adjusted gross income (“AGI”). Exception: if you are over age 65, or turn 65 during the tax year, you are allowed to deduct these expenses if they exceed the lower threshold of 7.5% of your AGI. This exception is a temporary measure through tax year 2016.
3) Claim A Tax Credit: If you pay her caregiver in order to free you or your wife up to work or to seek work, you may be entitled to a Dependent Care Tax Credit. A tax credit is actually more valuable than a tax deduction. See IRS Publication 503. However, you cannot claim both the credit and a deduction for the same expense.
So, tally your expenses and discuss these issues with your tax advisor. You may find that Uncle Sam will share some of your financial burden by extending one of the above tax benefits to lower the amount you pay in income tax.