Elder Care Tax Breaks

Tax Report

If you're paying for the care of an elderly parent or relative, you may be able to take advantage of several tax provisions that could help you recoup some of your expenses.

Dependency Exemption

Generally, you may claim a dependency exemption ($4,000 in 2015) for an individual if you provide more than 50% of the individual's support costs and the individual:

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  • Lives with you or is related to you
  • Does not have gross income exceeding the exemption amount
  • Does not file a joint return
  • Is a U.S. citizen or a resident of the U.S., Canada, or Mexico

The exemption is phased out for higher income taxpayers.

Medical Expenses If you pay medical expenses for your dependent parent (or other dependent relative), you may include those expenses with your own for tax deduction purposes.* The deduction may also be available if your parent or relative fails to qualify as your dependent because of the gross income and/or the joint return test listed above. Medical expenses include the qualifying long-term care costs of a "chronically ill" individual.

Dependent Care Credit Additionally, you may be entitled to a tax credit for a portion of any costs you incur for the care of your parent or relative that enables you and your spouse to work. Your parent or relative must live with you and be unable to care for himself/herself. •

* Medical expenses are deductible to the extent they exceed 10% of your AGI (or 7.5% of AGI if you or your spouse is 65 or older).

Is a Lump-sum Payment Right for You?

Traditional pension plans ("defined benefit" plans) generally provide lifetime monthly benefits to retirees. Because pension obligations are costly, employers that sponsor defined benefit plans sometimes offer individual plan participants an immediate lump-sum payment as a payout choice. If you participate in a defined benefit plan, carefully consider any lump-sum offer you may receive.

A recent report from the U.S. Government Accountability Office* describes key types of information participants should have to properly evaluate a lump-sum offer, including:

Mortality and interest rate assumptions. The calculation of the lumpsum amount depends in part on the participant's estimated life expectancy. The longer the life expectancy, the higher the lump sum needed to provide the plan benefit. The assumed interest rate also affects the calculation. The higher the interest rate, the lower the lump sum.

All current options under the plan. For comparison purposes, a participant should know what the plan's monthly benefit amount would be at normal retirement age, whether there is a subsidized early retirement option, what the monthly benefit amount would be if payments were to begin immediately, and how the lump-sum payment compares to the value of the plan's lifetime annuity.

Potential tax consequences of choosing a lump sum. How the lumpsum payment would be taxed, any early distribution penalties, and available rollover options should be considered.

Relative risks. The risks associated with investing a lump sum and the possibility of outliving the money (longevity risk) are among the risks that should be considered. Also be informed about the extent to which existing plan benefits are guaranteed by the federal government in the event the plan sponsor defaults on paying the benefits.

Short Takes

Filing Dates for Federal Income-tax Returns The IRS announced that the deadline for most individual taxpayers to file their 2015 federal income-tax returns is Monday, April 18, 2016, to accommodate the observation of Emancipation Day in the District of Columbia on Friday, April 15, 2016.

IRS rules require that the filing deadline be moved to the next business day if April 15 falls on a legal holiday. A separate state holiday (Patriot's Day) will allow Maine and Massachusetts taxpayers to file their federal returns on Tuesday, April 19

Break

IRS Increases Mileage Rate For 2015, the standard mileage rate taxpayers can use to compute the deductible costs of operating an automobile for business is 57.50 per mile (up from 560 per mile in 2014). The standard mileage rate is generally available as an alternative to the actual expense method, which requires accounting for items such as maintenance, repairs, gasoline, etc.

The 57.5e rate will also apply to employers that use the cents-per-mile method to determine the fringe benefit value of an employee's use of a business automobile for personal purposes.

* GAO 15-74, January 2015

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