Tax Breaks for Caregivers
At some point in your life, you may find yourself caring for elderly parents or other relatives. Or you may be doing it now. Whether it's hands-on care or financial aid only, providing care may allow you to take advantage of certain tax breaks.
Dependency exemption. The person you are caring for may qualify as your dependent. There are various requirements, including one that says you must provide more than 50% of the person's support costs. In addition, the person's gross income can't exceed the exemption amount, the person can't file a joint tax return, and the person must be a U.S. citizen or resident of the U.S., Canada, or Mexico. If you are entitled to the exemption, it will shave as much as $3,900 off of your income in 2013.*
Filing status. If you aren't married, caring for an elderly relative who is your dependent may allow you to qualify for the more favorable "head of household" tax-filing status. The cared-for relative generally must live in your household and you must pay more than half the household costs. However, your parent needn't live with you as long as he or she is your dependent and you pay more than half your parent's household costs.
Medical expense deduction. If you pay the individual's medical expenses, you may be able to deduct them (within tax law limits). Eligible medical expenses include the costs of qualifying long-term care services for a chronically ill person (for example, nursing home expenses). The individual either must be your dependent or not qualify as your dependent only because he or she files a joint return or has gross income in excess of the exemption amount.
* Personal exemptions are subject to an incomebased phaseout.
Renting Out a Former Residence
Homeowners on the move sometimes decide to convert their principal residences into rental properties. Renting out a former home can be especially appealing when it can't be sold for an attractive price due to market conditions or when substantial future appreciation is anticipated. What are the potential tax effects?
Rental income and expenses. These amounts are reported on the owner's income-tax return. Deductible expenses include money spent on advertising, cleaning and maintenance, insurance, mortgage interest, real estate taxes, repairs, and utilities, as well as depreciation (a noncash item). Even if a rental property is "paying for itself," it may show a tax loss for the year because of depreciation. Rental loss deductions are limited by the tax law's passive activity rules.
Sale of the property. Capital gain realized on the sale of a residence that has been converted into a rental property generally will be taxable. However, the homeowner might be able to exclude up to $250,000 of capital gain ($500,000 on a joint return) if the home was owned for at least five years, the rental activity was temporary, and the home was rented for no more than three years during the five years preceding the sale. Even then, gain would be taxable to the extent of allowable depreciation.
The general information in this publication is not intended to be nor should it be treated as tax, legal, or accounting advice. Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. This information is not intended to be nor can it be used by any taxpayer for the purpose of avoiding tax penalties.
2013 Sep Pg 02