101. Save $1,000s per year – 8 ways to save money on your taxes on family caregiving

Here are 8 strategies that saves you money in taxes to take care of a family member:

1. Claim your (grand)parent as a dependent

Doing so gives you an additional exemption for tax purposes. The criteria for doing this? You must have provided more than half of your (grand)parent's total support for the calendar year. Also, your (grand)parent's gross annual income has to be below $3,650 (for tax year 2010). But that's $3,650 in addition to Social Security benefits -- Social Security isn't counted. If your (grand)parent doesn't have a pension and his primary income is Social Security, you may well qualify.
For you as the caregiver, the tax savings can be significant; for tax year 2010, the exemption from taxable income for each dependent is $3,650. If you're in the 25 percent tax bracket, that would mean you'd cut your taxes by about $900.
To calculate if you provided more than half of your (grand)parent or other family member's support, you have to first determine his or her total cost of living, including the value of housing, utilities, food, and out-of-pocket medical expenses. The Internal Revenue Service provides instructions and a worksheet to help you do this calculation in IRS Publication 501.

2. Set up a multiple support agreement

What if you and your siblings are sharing the care for an aging parent or other relative? In that case, the tax laws offer something called a Multiple Support Declaration, which allows one person to claim the tax exemption for a dependent family member even though more than one are sharing support. Everyone who's financially contributing to the aging family member's support must sign a special Multiple Support Declaration form provided by the IRS. The person claiming the exemption submits the form with his or her tax return.
There are four basic criteria to meet in order for you to receive a tax exemption for your parent or other dependent family member. They are:
You pay more than 10 percent of the dependent family member's support.
The amount paid by you and others together totals more than half the family member's financial support.
Each contributor could have claimed the exemption, except that each gave less than one-half of the total financial support.
Each contributor who paid more than 10 percent of the support agrees that you can take the tax exemption on your return (which means that none of them can do so in the same tax year).
In other words, what's happening here is that you and your siblings share care and financial support of your parent or other family member, but you all agree that you -- perhaps because of your role as primary caregiver -- get to claim that person as a dependent.

3. Set up a flexible spending account

Flexible spending accounts, or FSAs as they're called, are an employee benefit provided by many companies; talk to your HR department to find out if your company has one. If so, you estimate how much money you're spending on your parent's medical and other expenses -- remember to count eyeglasses, dental care, medications, and pharmacy supplies -- and your employer pulls this amount out of your paycheck before taxes, so the money is tax-free. You're then allowed to use the money in this account to reimburse yourself for those medical expenses.

4. Claim all possible expenses on your taxes

You'd be amazed at what's tax deductible if you read the fine print carefully. In many cases, not only are medical expenses for you and your dependents (including your parent) deductible, but also travel expenses to get to your or a dependent's medical appointment (either as a per-mile driving charge plus parking and tolls, or as cab fare). According to the IRS, medical travel expenses are a deductible expense "when anyone accompanies an individual for medical care who is unable to travel alone." Sound like your situation? There you go.
According to the IRS, you can also claim medical expenses for anyone you claim as a dependent who's in a nursing home or retirement home. To find out more about these tax issues, consult a tax professional or go to the IRS website.

5. Claim the adoption tax credit when you adopt a child

If your income is under $222,520. You can claim a tax credit of up to $12,150 for adoption fees, attorney services, court costs, and other expenses in the year the adoption is final.

6. Claim the child tax credit (for children up to 13 years)

If your income is under $75,000 ($110,000 for joint filers) you are eligible to receive up to $1,000 for any child, stepchild, grandchild, adopted child, or foster child in your care.
Sometimes it seems that it’s more expensive for both parents to work than for one to stay home and take care of the kids. And in many situations, it is. However, the Childcare Tax Credit eases the burden of childcare costs, especially if you work only part time. The Childcare Tax Credit is exactly that — a credit. This makes it incredibly valuable as it directly reduces your tax bill. This credit is calculated based on childcare expenses for children up to age 13 (older if they are physically or mentally incapable of caring for themselves), that amounts to 20-35 percent of qualifying expenses depending on your Adjusted Gross Income. Maximum qualifying expenses are $3,000 for one qualifying dependent and $6,000 for two or more.

7. Set aside money in your employer’s dependent care plan

Although tax-free reimbursements by your employer reduce the child and dependent care credit you are allowed to take, they are still a good deal for taxpayers in the 20 percent tax bracket and above.

8. Hire your kids and tax-deduct their wages from your personal tax return

Also check out idea nr. 107: $$ Save $1,000s per year in taxes – Hire your kids and tax-deduct their wages from your personal tax return

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Talk to your tax adviser to properly implement these tax breaks.

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