The Internal Revenue Service (IRS) allows you to claim your elderly parent as a dependent on a tax return as long as no one else does. If you choose to claim an exemption for your parent, you must also ensure that you are not an eligible dependent to another taxpayer. This restriction is effective even if the taxpayer who can claim you as a dependent chooses not to.
Satisfying the gross income test
Unlike claiming a child as a dependent, it is not necessary that your elderly parent live with you. However, if your parent has gross income that is not exempt from tax of $3,650 or more, you cannot take their exemption on your return. When evaluating your parent’s gross income, do not include their social security payments and other tax-exempt pensions. Their gross income does include, however, dividends, capital gains from the sale of stock, interest earned in a bank account and other passive investments such as income from rental properties they own.
Satisfying the support test
Not only must your parent have minimal gross income, but you must also provide more than half their financial support during the tax year. Satisfying the requirements of the support test requires a comprehensive evaluation of your parent’s expenses. The fact that your parent receives sufficient income during the year does not necessarily mean the funds are used for their support. The support test looks to who actually pays rather than the parent’s ability to pay. For example, if your elderly parent only uses their Social Security benefits to pay $300 in monthly rent and you provide all other expenses that total more than $300 each month, then you will satisfy the requirements of the support test even if your parent puts thousands of dollars of tax-exempt income into a savings account each month.
Sharing your parent’s exemption
Oftentimes an elderly parent receives financial support from multiple children during the tax year. In total, the children may satisfy the support test; however, as individuals they may not. The IRS permits these siblings to take turns claiming the parent as a dependent if in the aggregate they can satisfy the support test. However, only a child who contributes at least 10 percent of the parent’s total support during the tax year is able to claim the dependency exemption. If you and your siblings agree to alternate claiming the exemption, the siblings who do not claim the exemption each tax year must sign a document stating that they will refrain from doing so in the current year.
If your Adjusted Gross Income (AGI) is more than the threshold amount for your filing status, you must reduce your total exemptions by 2 percent for each $2,500 or part of $2,500 that your AGI exceeds the limitation. However, the exemption will never be reduced to zero, regardless of your AGI. For example, in 2010, a single taxpayer with AGI of $166,800 or more must reduce the $3,650 exemption accordingly. Therefore, if your AGI is $169,400, you must reduce the exemption by 4 percent to $3,504 since the excess equals $2,600.