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Aging America: Changing Family Dynamic May Lead to Tax Relief

Ageing AmericaWASHINGTON (AP) - Members of the sandwich generation -- caught between supporting elderly parents whose assets are nearly exhausted and adult children without jobs -- might find some relief come tax time.

The bottom line is, who's a dependent? Your kindergarten-age son, your adult daughter, her grandparents, or maybe an elderly uncle or aunt?

"There's a changing family dynamic because of the economy," said Bob Meighan, vice president of TurboTax, an online tax preparation service.

More people are living longer. According to the U.S. Census Bureau, the number of older Americans increased by 9.7 percent from 2000 to 2010, when there were about 40 million people age 65 or older. A longer lifespan puts added strain on retirement accounts, which have already taken a hit in the roller-coaster economy.

As a result, many baby boomers find themselves supporting their elderly parents, in some cases footing the bill for assisted living or nursing home care.

Meanwhile, the unemployment rate for adults age 20 to 24 was 13.7 percent in December, considerably higher than the overall rate of 7.8 percent.

Unable to find work, many young adults are returning home - or never leaving, relying on Mom and Dad for food, lodging and more.

What does this mean for taxes?

"A lot of filers are going to have to pay particular attention," Meighan said. More people may rely on tax software to help get them through the dependency issue.

Depending on individual circumstances, taxpayers may be able to claim both their parents and their children as dependents.

"The rules are very pro-taxpayer," said Mark Steber, chief tax officer at Jackson-Hewitt Tax Services. If you are taking care of someone and the IRS defines that clearly - age, income, residency tests and support - you should be able to claim the exemption, he says.

It comes down to the definition of dependent.

The Internal Revenue Service makes a distinction between a qualifying child and a qualifying relative.

To be a qualifying child, the person would have to be a child, stepchild, foster child or sibling, and under the age of 19, or 24 if in college, who has lived with you for at least half the year. The taxpayer would have to provide at least half the support.

A qualifying relative can be a child who doesn't meet the qualifying child requirement, a parent or stepparent, grandparent, niece or nephew, aunt or uncle or in-laws, according to the IRS. They do not necessarily have to live with you, but you do have to provide at least half the support for that person. And that person's income cannot exceed the personal exemption - $3,800 in 2012.

"Unlike a qualifying child, a qualifying relative can be any age," the IRS says in its Publication 17.

Taxpayers can take an exemption of $3,800 for each qualified child or relative who is a dependent.

Here are some examples from the IRS:

"Your mother received $2,400 in Social Security benefits and $300 in interest. She paid $2,000 for lodging and $400 for recreation." If you spend more than $2,400 to support her, supplementing what she spends, and her annual income is less than $3,800, you can claim her as a dependent and take the full value of the exemption.

"Your brother's daughter takes out a student loan of $2,500 and uses it to pay her college tuition. She is personally responsible for the loan. You provide $2,000 toward her total support. You cannot claim an exemption for her because you provide less than half of her support."

Usually the items that go into determining support are the cost of housing, food, clothing and medical costs, including doctor bills and medicine

But it's not just the personal exemption that could help taxpayers. Individual taxpayers might qualify and get the "extra benefit" of filing as head of households if they legally can claim children, parents or relatives as a dependent, said Jackie Perlman, principal tax research analyst for H&R Block .

For example, the 15 percent tax bracket applies to taxable income up to $47,350 for heads of households and $35,350 for individual returns. At the 25 percent tax bracket, it's $133,300 for heads of households and $85,650 for single filers.

Steber said taxpayers have to understand that it's not just nuclear family members who might qualify. Think beyond children and parents. If you're providing half the support for an aunt or uncle, niece or nephew whose income for the year was under $3,800, you may be able to claim them as dependents.

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lstjames1

This is ridiculous.
The qualifying relative (child or otherwise) cannot make more than $3,800 in a year ($317 a month or $73 a week)? This is way below the poverty level of $11,170 in 2012, which is already incredibly conservative. This person would be homeless and starving if not for the relative taking care of them.
Why doesn't the IRS allow the standard deduction for a single person (5950) to be used to calculate financial dependency, since it is close to 50% of the poverty guideline for a single person in 2012 ($11,170)? If a relative is contributing at least 50% of the US poverty guideline for a single person, how is the relative not a dependent?
If the dependent's adjusted gross income is $4000, and he/she filed a tax return, the taxable income would automatically be reduced by the personal exemption (3800) and the standard deduction (5950 for single), which would be $9,750 for a single person, so the government would eventually pay more.
The government's policy appears to discourage family members from taking care of each other. It would be far more expensive for the government to supplement the relative's income if they lived by themselves than to give someone taking care of them the 3800 exemption, which would only reduce the person's adjusted gross income that is taxed, as it is not a 3800 refund.
For someone in a 15% tax bracket, it would only be a tax savings of $570 (3800 x .15) for the entire year, which would equal $48 a month for the person who takes care of the dependent.

January 27 2013 at 11:16 AM Report abuse +2 rate up rate down Reply
ccdae5

I'm more worried about our government's bloated giveaway programs!

January 27 2013 at 8:49 AM Report abuse +2 rate up rate down Reply
jonclong

viddanny, I hope you see this.
I agree with your post 100%
Beginning with LBJ, the President/Congress has treated the Social Security "Trust" fund as a private playground for their "Let's get me re-elected" projects.
These "loans" are not included in the National Debt because (per the politicians) "We owe it to ourself".
I just hope that when I retire, my creditors will accept the same argument (i.e., We owe it to ourself, so I don't have to pay".)

January 25 2013 at 10:57 PM Report abuse +3 rate up rate down Reply
jdyhyt

I have credentials and social security is not considered income for taxes but then again neither is child support as far a the government is concerned. That is because you paid taxes on your socials security and someone paid taxes on the child support.

January 25 2013 at 10:16 PM Report abuse rate up rate down Reply
1 reply to jdyhyt's comment
ga7smi

1/2 of SS income is taxable in many instances - and SS is considered unearned income for some programs when it clearly has been earned

January 27 2013 at 3:10 PM Report abuse +2 rate up rate down Reply
davefromfwb1

Who makes less than 2400 per year? Man if you make less than that you'd have to be a quadraplegic. They make it sound like it's so easy to take care of someone else if they are family....but in reality ANYONE is going to make more than 3,000 per year collecting social security or a part time job. Someone would hav to basically be a 12 year old person to not make 3000 per year.

January 25 2013 at 8:58 PM Report abuse rate up rate down Reply
vlddanny

Very sad that a senior parent making more than $74/week, that is provided most other living expenses, like shelter, phone, electricity, utilities, cable, transportation, etc. does NOT qualify as a dependent for their child or grandchild that they live with. What does the government expect them to do, reduce their social security to $3,800/year ($317/month), so their keeper qualifies for this BS piddly offsetting exemption. I don\'t think so.

It is VERY sad that the retirement program (social security) our government forced on us was then robbed by them. Diminishing significantly the potential for return on the investment. Broke basic golden rule of retirement investing, DO NOT EVER ROB FROM YOUR RETIREMENT BEFORE RETIRING.

If social security retirement wasn\'t robbed, there would have been more than enough money in it for all the middle class to retire as millionaires, after putting in for 40 years, with an average return of 5%. There would not be an unemployment problem. And a lot more cash in our hands to help those that need help. Instead of government taxing us and government deciding who is needy and deserving of help, and monitoring it

January 25 2013 at 8:43 PM Report abuse +7 rate up rate down Reply
Jeannette

The person must have gross income less than $3400 in 2007. Social Security is not considered gross income under this test. However, most other types of income are including:
Wages and self-employment income
Interest and dividends
Gross rental income
Pensional and IRA income
Gambling winnings
Most other income that would be required to be reported on a tax return

January 25 2013 at 7:15 PM Report abuse +1 rate up rate down Reply
Jeannette

SS Is NOT considered income

January 25 2013 at 6:53 PM Report abuse +3 rate up rate down Reply
ragtopdaz

YA RIGHT... Wellfare is the way to go now..

Your tax dollars providing joy to the needy..

Welfare recipients take out cash at strip clubs, liquor stores
Published January 06, 2013

New York Post

They’re on the dole — and watching the pole.

Welfare recipients took out cash at bars, liquor stores, X-rated video shops, hookah parlors and even strip clubs — where they presumably spent their taxpayer money on lap dances rather than diapers, a Post investigation found.

A database of 200 million Electronic Benefit Transfer records from January 2011 to July 2012, obtained by The Post through a Freedom of Information request, showed welfare recipients using their EBT cards to make dozens of cash withdrawals at ATMs inside Hank’s Saloon in Brooklyn; the Blue Door Video porn shop in the East Village; The Anchor, a sleek SoHo lounge; the Patriot Saloon in TriBeCa; and Drinks Galore, a liquor distributor in The Bronx.

January 25 2013 at 6:43 PM Report abuse +3 rate up rate down Reply
crimeslawyer

There is still hope. Obama's death squads may rescue us from all these old people.

January 25 2013 at 6:40 PM Report abuse -2 rate up rate down Reply