By Rosanne Rogé, CSA, RFG, CFP®
Frequently referred to as the “Sandwich Generation,” Baby Boomers are increasingly tasked with caring for both aging parents as well as minor aged children, or “boomerang” adult children who have returned home due to divorce or the economic environment. In fact, according to the Pew Research Center, nearly 15% of middle-aged adults are contributing financially to both aging parents and children. In addition, 75% of adult children agree that they have a responsibility to provide financial assistance to an aging parent. 1
Due to advances in medicine and quality of life, individuals are facing longer life spans for which they may not be financially prepared. In addition to the demise of defined benefit pension plans, families are often spread throughout the country or even overseas, which has added stressful, long-distance situations to the already difficult nature of care giving.
To help relieve some of the pressure that comes with care giving, here are seven ways in which the “Sandwich Generation” can financially assist their elderly parents.
- Tax Advantages
A child may claim an exemption on their tax return for the care of aging parents provided several requirements are met. For example, the parent must not file a joint return unless only to claim a refund, they must be a U.S. citizen, and the parents’ gross income cannot be greater than the personal exemption amount of $3,950. Since some Social Security payments may be included in this figure, many seniors with modest incomes from pension, interest or investments may be excluded.
In order to claim a parent as a dependent, a child must furnish more than one-half of the support during the year. In addition to food, medicine and other support items, if the parent lives in the caregiver’s home, the fair market rental value of the lodging can count towards part of the support provided. One of the advantages of this provision is that the parent does not have to live with you. If the parent resides in their own home, in an assisted living facility or a nursing home, the costs paid for this type of support at those locations is counted towards meeting the IRS requirement.
If multiple siblings are contributing to the care of parent, it’s important to fill out a Multiple Support Agreement to see which child will be able to claim the parent as a dependent on their tax returns. The form indicates that while multiple siblings contributed to the parental support, the others waive any tax-exemption claim. This provision allows siblings to alternate who claims their parents as a dependent from year to year. For more information, visit https://www.irs.gov/ and search for IRS Publication 501: Exemptions, Standard Deduction and Filing Information.
- Medical Expense Deduction
Once the parent(s) meet the IRS dependency test rules, any medical expenses that are paid for by the caretaker child can be used towards this itemized deduction. Since the medical costs need to exceed a certain percentage of the caretaker’s adjusted gross income (10% if the caretaker is under 65 years of age, 7.5% if the caretaker is over 65) before they can be claimed, a parent’s expenses may help meet the requirements. These costs include the premiums for supplemental Medicare coverage or long term care insurance. Assuming all the requirements are met, a family (particularly with parents, grandparents and dependent children all in the same household), could benefit from pooling all of the medical expenses together in order to qualify for the medical deduction.
In addition, if the parent requires continual care so that the caretaker may continue to work, adult children caretakers may be able to qualify for either the dependent care credit or an employer-sponsored Flexible Spending Account. The dependent care credit allows for tax credit of up to $1,050 based upon the amount spent on dependent care and the gross income of the caregiver. An employer-sponsored Flexible Spending Account has a limit of $2,500 per person, or $5,000 per family for joint filers, which can be excluded from an employee’s gross income as long as each spouse makes $5,000 or more per year. Taxpayers will need to run the numbers under both scenarios to determine if they are better off with the dependent care credit (which can be reduced based upon AGI) or using an FSA pre-tax payment (which pays for the services on a pre-tax basis).
- Legal Aid
To avoid fostering resentment and guilt among family members, the retainer of an Elder Law Attorney can help the family create a plan that takes all the various scenarios into account, ensuring that all family members are on the same page and know what to expect. In addition, it is extremely important that powers of attorney, health care proxies and living wills are prepared prior to the parent moving in with a child.
- Annual Gifting
If financially feasible, children can gift their parents up to $14,000 per year ($28,000 for both parents). If multiple siblings participate, this can pay directly for a parent’s medical expenses, including skilled in-home care. This gifting can also help pay Long Term Care policy premiums which covers both home health and skilled nursing care.
- Home Improvements
Certain improvements made to accommodate a home for a taxpayers’ disabled condition or that of a spouse or dependents that reside in the home, and do not increase the value of the home or done for architectural or aesthetic purposes, can be deducted in full as medical expenses. Examples of this type of renovation would be exit or entrance ramps, widening doorways, hallways or interior doorways, installing railings or support bars, modifying kitchen cabinets, adding handrails or grab bars (either inside or outside of a bathroom), and modifying hardware on doors.
The deduction is limited to the excess of the actual cost of the improvements over the increase in the fair market value of the home, if any. For example, if an elevator was installed at the cost of $11,000 and increased the property value by $6,000; the $5,000 difference would be fully deductible as a medical expense. Improvements made by renters are fully deductible since they do not own the property.
- Reverse Mortgage
A Reverse Mortgage may be a way (albeit expensive up front due to fees) for a parent to remain in their home, and pay for their own expenses and remain independent. A reverse mortgage is a type of loan that enables senior homeowners to convert part of the equity in their homes into income without having to sell the home, give up title, or take on new monthly mortgage payments (as in a refinance). Reverse mortgages are available to individuals age 62 or older who own their own homes. Funds obtained from a reverse mortgage are income tax free and do not affect the receipt of Social Security or Medicare benefits. Borrowers can choose to receive the funds as a lump sum, monthly income, or as a line of credit. The funds can be used in any way they wish.
The amount of money allotted depends on how old the applicant is at the time of closing, the value of the home (less any liens) and current interest rates. If there is an existing mortgage on the home, it must be paid off at closing. All reverse mortgages are “non-recourse” loans which means the borrower can never owe more than the value of the home regardless of the loan balance. The loan becomes due when the borrower sells the property, permanently leaves the home (to go to a nursing facility) or passes away. The debt the borrower or their heirs owe equals the entire loan advances taken plus interest. More information on this type of mortgage can be found at www.hud.gov.
- VA Assistance Pension for Veterans and their Spouses
If your parent is a Veteran, or the spouse of a Veteran, they may be entitled to a little known and underutilized benefit known as the Aid-and-Attendance Benefit. In order to qualify, your parent(s) must require the aid of another person in order to perform personal, everyday living functions; reside in a nursing home; have limited eyesight; or must be bedridden.
These benefits can be a great advantage for those veterans and their families who may be in need of financial assistance either at home or in assisted living facilities, or who require other long term care services. In addition, the benefits are tax-free to the recipient. Those hoping to qualify can seek out free help through a regional, state or county-level Veterans office. To find a local office, visit www.va.gov, click on the tab titled “locations” and click on Regional Benefit offices. You can also contact the Department of Veterans Benefits at 1-800-827-1000.
For more information on care giving, or planning for the future, please contact R.W. Rogé & Company, Inc. at 631.218.0077 or at firstname.lastname@example.org.