NEW YORK (AP) — Is your unemployed college graduate “occupying” your couch? Has your elderly parent moved in with you, or are you paying for an assisted living facility?
If so, these issues likely have stirred up a host of emotional and financial issues in your home. They may also impact your taxes.
“We see this more and more,” said John Steffee, a partner at the accounting firm Pfister and Rompalo, in Wormleysburg, Pa. With the economy continuing to sputter, adult children frequently can’t find jobs, and older parents are having trouble keeping up with their homes. “And all of a sudden, they have grandma and grandpa, mom and dad and the kids under one roof. Just like the Waltons.”
Most households bear little resemblance to that wholesome television brood of the 1970s, but data confirm Steffee’s impressions. A review of census data by the Pew Research Center last year found that by 2009 about 7 million households in the U.S. consisted of two adult generations, and another 4.2 million households had three generations living under one roof.
Kristine and Kevin Tanzillo brought her mother, Nancy Haugen, to live in their Myrtle Springs, Texas, home about five years ago because she needed near constant care after spinal surgery.
Haugen, 73, receives Social Security and a small pension, but together they make for a “pretty meager” income, her daughter said. Although the Tanzillos paid Haugen’s mortgage and other living expenses before she moved in, it was only when they began sharing a home that the couple started claiming Haugen as a dependent.
That will be a $3,700 deduction on their 2011 tax return.
Just sharing living quarters isn’t enough to qualify someone as your dependent, so it’s important to make sure they meet the support test laid out by the Internal Revenue Service.
For someone to qualify as a dependent, the taxpayer must provide more than 50 percent of the person’s annual support — including housing, food and medical care. For someone sharing a home, the total support figure would include the market value of the space the parent is living in, Steffee said — for example, the cost of renting a comparable room or apartment.
The dependent’s total support figure is based on an annual tally, so it doesn’t matter how many days or months you contributed. That means Social Security and other government benefits must be counted toward that support, along with pensions and any personal savings. In addition, the individual must not have earned more than $3,700 in 2011, or about $310 per month, outside of government benefits.
Haugen didn’t have to live with the Tanzillos in order to be claimed as a dependent. Since they were paying the bulk of her living expenses in the years before they combined households, their accountant told them they would be able to make the claim.
But Kristine Tanzillo initially didn’t feel comfortable. She said she worried about an audit, despite the reassurance from her accountant.
Also, at that time, her mother was still independent. “We didn’t want to intrude on that,” Tanzillo said.
The fist request for her mother’s financial paperwork created a little friction, but now, it’s just part of normal family business.
Andrew Schwartz, a certified public accountant in Woburn, Mass., said many of his clients claim parents as dependents. Most take the claim readily.
Another potential tax benefit may come from medical expenses. The IRS requires that family medical expenses exceed 7.5 percent of adjusted gross income before they are deductible, a difficult threshold for most families to meet. The additional costs for an older parent, especially one with serious health concerns, may lift costs to above that line.
Even if the family earns enough to have to pay the alternative minimum tax when filing their federal return — usually those who earn between $150,000 and $650,000 per year — Schwartz said claiming a parent as a dependent may help save on state or local income taxes.
Adult children who have returned to the nest may also be considered dependents in many cases. Like the older generation, the main issue is whether you are providing their support.
Parents may claim children living with them as dependents up to age 19 automatically. Full-time students may be claimed up to age 24.
But plenty of young adults are living with their parents after those cutoffs, largely because of the economy. The federal government pegs the unemployment rate for people 20 to 24 years old at 14.4 percent, much higher than the 8.5 percent overall rate.
Other relatives may also qualify as dependents if they live in the same home, and non-relatives may also squeeze in under certain conditions.
Most tax preparation software asks simple questions that can help a taxpayer determine who qualifies, but for complicated living arrangements it may be helpful to consult a professional tax preparer.
Steffee warned that there can be all kinds of hazards because the regulations are very specific. “You have to be really careful,” he said. “And make sure you don’t trip over the rules.”