Sandwich Generation: tax breaks available

Sandwich Generation: tax breaks available

According to a Pew Research Center poll, 29% of parents with grown children had a child move back home in recent years, primarily due to economic conditions. At the same time, about 10 million boomers care for an elderly parent, according to a 2011 study by the MetLife Center for Long-term Care.

Living situations have changed for many baby boomers who now have the dual responsibility of caring for aging parents and supporting their adult children. And it’s taking a financial toll. While they are busy supporting others, caregivers may not pay attention to their own savings needs or eligibility for tax relief. MetLife’s study also found that these caregivers are estimated to lose approximately $3 trillion in wages, pensions, and Social Security benefits over a lifetime by foregoing jobs to provide care.

Advisors can play an important role in helping Sandwich Generation clients navigate the challenge of saving on a strained budget and taking advantage of the tax breaks or deductions they deserve.

Who qualifies?
Caregivers may find they are eligible to take advantage of tax deductions, but first they must determine whether the parent or child is a dependent. The Internal Revenue Service offers guidance in a number of publications, including Publication 17 and Publication 501. Some tax deductions increased for tax year 2012, including the personal and dependent exemption.

Caring for parents
Taxpayers may claim a parent as a dependent whether they live with the parent or not, but there are several criteria that need to be met, according to the IRS, including:

  • The taxpayer is not a dependent of another taxpayer
  • The parent is not filing a joint return
  • The parent is a U.S. citizen, U.S. national, U.S. resident, or resident of Canada or Mexico
  • The taxpayer paid more than half of the parent’s support for the year
  • The parent’s gross income must be less than the exemption amount

If a parent is a dependent, the taxpayer may also be able to claim a deduction for a portion of medical and dental expenses. Again, there are limits set by the IRS.

Supporting an adult child
To claim a dependent, a grown child must fit the IRS definition of a qualifying child or qualifying relative, but several tests must be met. In addition, if the child is under age 27, parents may be able to take advantage of deductions for medical expenses under provisions of the Affordable Care Act.

As the economy continues its slow recovery, it is likely that many more families will find themselves falling into the Sandwich Generation — and calling on their advisors for help.

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