It’s not uncommon for adult children or siblings to act as caregivers for family members or give them financial assistance for medical or long-term care needs. The problem is that all too often those providing the help don’t take advantage of the tax benefits.

Types of Care

Caregiving happens through many different avenues. For example, family members might pay for services that their elderly parents need, such as housekeeping, meal preparation, or nursing care. Outside the home, they may pay for all or a portion of the cost of an assisted living facility.

In other circumstances, individuals could directly provide the care instead of paying for it. This could happen in either the home of the person giving the care or in the home of the person receiving the care. They might also support the relative’s daily living expenses by paying for groceries, utilities or other essentials.

Assessing the Tax Breaks Available

Step one is to figure out if the person receiving care qualifies as a dependent on the caregiver’s tax return. While there are no longer personal or dependent exemptions, qualifying as a dependent opens the door to deduct medical expenses and other medical-related tax breaks. Let’s look at an example to understand the details better.

Dependent Test

Under our scenario, we have Rob taking care of his mother, Laura. Rob is allowed to claim Laura as a dependent if a set of tests are met. First, Laura’s gross income must be less than $4,300 in 2021. While this might seem low, note that tax-exempt interest and Social Security benefits are usually not included.

Second, Rob needs to provide the majority of Laura’s support in the calendar year. “Support” includes basic necessities such as clothes, a place to live, medical expenses, and transportation. In cases where the cared-for relative lives with the taxpayer, they are able to use the equivalent rental value of the housing provided. Given the broad definition of support, it’s often not too hard to meet this test – but make sure to keep diligent records, tracking the amount spent versus the dependent’s total support costs. You can always plan some extra payments near year-end to bump yourself over the 50 percent threshold.

Third, Laura needs to be a United States citizen.

Fourth, the location of the dependent matters. In the case of relatives such as parents, stepparents, grandparents, great-grandparents, and aunts and uncles, these persons can be considered a dependent even if they do not live with you. This means you can be helping them to live in their own house or care facility.

Fifth, Laura cannot jointly file a return with any other taxpayer.

Brothers and Sisters

What happens if you and some of your siblings split the support of a parent? It’s easy to see how in this case no one will meet the majority support test.

In the case of multiple support providers, someone can still claim the person as a dependent as long as all the supporting siblings agree on who makes the claim, and they file an IRS Form 2120, Multiple Support Declaration noting it.

Each Form 2120 signer must contribute at least 10 percent support for the year. The siblings can rotate who claims the deduction or keep it the same each year.

Why Dependency Matters

Given that the personal and dependent exemptions have been eliminated, you might wonder what all the fuss is about the person being cared-for qualifying as a dependent. Well, the answer is the taxpayer who can claim the dependent is the one who can itemize the dependent’s medical expenses as well.

Medical Expense Tax Benefit

The potential benefit comes when Rob is able to add his mother’s medical expenses to those of the rest his family. This can allow him to take a larger medical expense deduction when he itemizes expenses on his tax return. Remember that in order to benefit from any itemized deductions, the total of all itemized deductions must exceed the standard deduction.

Indirect medical costs also can be deducted, but only if the person cared-for qualifies as a dependent. Mileage costs for providing transportation to medical appointments and treatments are deductible. In 2021, this expense is deductible at $0.16 per mile.

Tis the season for summer jobs for high school and college kids. These seasonal jobs are more than just an opportunity for teens and college students to earn some money and gain experience. They also provide the opportunity for seeding a significant retirement nest egg and even a down payment on a home through a Roth IRA.

Seems too good to be true? Well, it’s not – but as always, the devil’s in the details, and it is not exactly a free lunch. So, let’s walk through exactly how this all works.

Step 1 – Earned Income

First, teen or college students must get a job that pays – and the more the better. This is because the gateway to opening and contributing to a Roth IRA is earned income. The magic number for earned income to max out a Roth IRA in 2021 is $6,000, as this is the contribution limit. This is because contributions are limited to the lesser of the $6,000 limit or 100 percent of earned income.

Step 2 – Make the Roth IRA Contributions

The next step is to make the contributions to the working child’s Roth IRA. Let’s be honest here. It is a rare case where a kid is going to take all or nearly all their summer job earnings and stash them away in a Roth IRA for 50+ years down the road. There is a way around this, however.

A parent or grandparent can contribute to the Roth IRA in the child’s[h1]  name, with two nuances. First, this contribution is still governed by the earned income limits discussed above. Second, these amounts count toward the $15,000 per year gift tax exclusion ($30,000 if married) so it will eat into that. Lastly, do not forget the deadline to make 2021 Roth IRA contributions of any type is April 18, 2022.

How Much is This Worth?

While $6,000 or so may not seem like a lot, it can make a significant difference over time due to the power of compounding returns from such a young age – coupled with the tax advantages of a Roth IRA.

To illustrate the power of this tax and investment move, let us take a scenario where a high school kid makes the $6,000 per year over three summers from age 16-18 before heading off to college, and the Roth IRA contribution is maxed out.

With contributions at just $18,000 and NEVER putting in another dime again, this will turn into the following amounts under different assumed investment returns by the time they are 66 (40 years of compounding).

• 6 percent return = $313,000
• 8 percent return = $783,000
• 10 percent return = $1.93 million

Now, before you get too excited, you must understand that 40 years from now $300,000 will not be what it used to be if inflation continues at historical rates – but the point remains. This simple move made over just a few years can create significant tax-free wealth.

Side Benefit

Due to the characteristic of a Roth IRA, the other beneficial options relate to withdrawal. First, the contributions can be accessed any time before age 59 ½ without penalties or taxes. Second, even after all the initial contributions are removed, a first-time homebuyer can take up to $10,000 without the 10 percent early withdrawal penalty to help fund the purchase, although they will owe income tax on the withdrawal if it has been less than five years since the initial contribution.

Be VERY careful here though, because any withdrawals will dramatically lower the investment returns noted above.

Conclusion

Funding a Roth IRA for a high school or college child or grandchild can give them a tremendous head start in life. A few years of relatively small contributions early on can create substantial wealth over time due to compounding of returns and the tax advantages of the accounts.