Pamela A. MacLean
RedwoodAge.com

For Americans caught between the cost of rearing children and contributing to the support of an elderly parent, tax relief may be available this year.

More than 40 percent of boomers help with the care of an aging parent - many of them do so financially - often at the same time they are sandwiched in a financial squeeze for the support of growing children, according to a recent Gallup-USA Today poll.  They may be helping care for an invalid parent, assisting them financially or faced with a grown child back home in a tough job market.

There are a number of tax breaks to help, from the Child and Dependent Care Credit, a $3,000 credit for the costs of in-home care that allow the taxpayer and spouse to go to work, and an exemption that may allow supporters to claim expenses associated with a parent's care.

More than 3.3 million Americans claimed a parent or older relative as a dependent in 2007, the latest IRS figures available, according to Jesse Weller, IRS spokesman in Oakland, Calif.

Boomers may be able to deduct lodging, food, utilities and medical costs they spend on a parent, if they meet tough qualifying tests. Even siblings who share care costs may be able to make claims, but check with a tax professional or IRS Publication 501 for the specifics.

"These tax breaks can be especially welcome benefits for those raising children while supporting their parents," said Amy McAnarney, executive director of The Tax Institute of H&R Block.

To claim expenses for support of a parent, the critical element is whether a parent, or other aging relative, fits into Uncle Sam's definition of "dependent."

Anyone hoping to claim a parent as a dependent must meet certain tests to qualify. And while they have some flexibility with children, qualifying a parent is tougher. But it is worth checking out. This year and next, each exemption allows you to reduce your taxable income by $3,650, according to Weller.

What's 'Taxable'?
Let's start with the two toughest dependent qualifications for claiming adults as dependents. The dependent's taxable gross income may not exceed $3,650, unless they are disabled.  Before you jump to the conclusion that your parent's income exceeds that, remember it is "taxable gross income" so income from Social Security benefits or tax exempt bonds may not count against them.  

It may be possible to exclude all or most of Social Security benefits and tax-free income from municipal bonds, according to Weller. If your parent receives $10,000 in Social Security benefits, they still may pass the gross income test of less than $3,650. So again, check with IRS Pub. 501 for specifics.

But use caution in calculating the source of a parent's income. A taxable pension or other taxable interest or dividend income will count against the $3,650 limit on the gross income test.

The second big hurdle is the support test. To claim a parent, grandparent, aunt, uncle, or other elderly relative as a dependent the taxpayer must provide more than 50 percent of the dependent's support.  So, for example,  if a relative receives $10,000 in Social Security payments that will count against the taxpayer in calculating qualifying for half the support, according to Weller. 

The starting point to estimate whether you meet the support requirement is to figure out the gross yearly expenses for your dependent relative and then calculate whether you, as the taxpayer, have provided more than half of the expenses.

You must prove you are responsible for at least half of a dependent parent's expenses for housing, utilities, food, clothing, medical costs over and above what Medicare and supplemental insurance provides.

Fair Market Value
If one or both of your parents live with you, use the fair market value of room and board to offset Social Security and see if you pass the 50 percent of income text. There are some subtle but important considerations when Mom or Dad contribute to their care. If they receive income from tax-exempt bonds that may not count against them in the gross income test - and if they leave the income in the bank, rather than spend it on their own support, if will not count in the 50 percent support test, according to Weller.

That is an important consideration for a boomer who may pay for care now, but recover the bonds as part of a parent's estate when their parent dies. 

There are several other basic qualifications for claiming adults as dependents.  They include:

• the dependent must be a US citizen, a US national or resident of the US, Canada or Mexico. 
• the dependent must not file a joint return for the year, unless it is to claim a refund of taxes withheld. 
• the dependent must either live with the taxpayer all year or be related, such as a parent, grandparent, stepparent, aunt or uncle. A parent living in their own home may still qualify if all the other income, support, citizenship and joint return tests are passed.

In addition, the sandwich generation may also qualify for other dependent-related tax breaks such as:

•  the American Opportunity Credit or Hope Credit, an education expense-related credit;
• the Lifetime Learning Credit; an education-related credit;
• Medical expense deductions and
• Student loan interest, tuition and fees deduction.