At one time, your parents were the ones giving you allowance. However, as they age, you may find yourself in the position of being the one giving them ongoing financial support or helping them with occasional monetary gifts. In these cases, optimizing these disbursements can keep your own taxes to a minimum.
Direct Financial Help
As of 2015, you can give up to $14,000 annually to each parent or $28,000 to a married couple without anyone incurring a tax liability. Otherwise, you must submit Form 709, also known as the gift tax return. Unless you surpass your lifetime estate tax exemption limit, which in 2015 stands at $5.43 million, you're only reporting a gift that exceeds the annual limit, not paying gift tax on it. However, these infusions can add to your parents' overall countable assets, which could disqualify them from obtaining Medicaid health coverage.
You may choose to give your parents money not as a gift, but a loan. Even so you could still trigger gift taxes if you lend more than the upper limit for tax-free gifts for that year and if the IRS is skeptical that the amount will ever be repaid. To avoid the funds being confused as a gift, charge interest to your parent -- at least the minimum qualifying interest rate for loans as designated by the IRS during a given year.
Dependent Exemptions and Credits
If you give money to your parent in the context of providing care for him, you may be able to get additional tax breaks by claiming him as a dependent. To qualify, you, as the caregiver, must not be the dependent of anyone else and must furnish more than half of your parents' living expenses. Your parent must not file a joint tax return with a spouse and also must meet income thresholds. If you can claim dependency and your parent lived with you, you may also qualify for the Adult Day Care tax credit, which allows you to write off a percentage of caregiving expenses.
Additional Tax Breaks
Family members who contribute more than 10 percent individually, and combine for over half the cost of a parent's care as a whole, can rotate claiming dependency by filling out a multiple support declaration, Form 2120. Only one person can claim the parent as dependent each year, and the form demands that you have a signed statement from everyone else who provided at least 10 percent of support that waives their right to claim your parent as a dependent. With medical expenses, direct payments to medical providers don't count against any gift or estate tax exemptions. Moreover, medical costs may be deductible if your parent is a dependent and the amount is over 10 percent of your adjusted gross income.
- Photo Credit KatarzynaBialasiewicz/iStock/Getty Images
How to Ask Parents for Money
Whether you are a child, a teenager or an adult, it will always be difficult to ask for money from your parents....
How to Borrow Money From Parents
Moving out of your parents' house, when you get married, go to college or get a job, comes with added responsibilities. When...
Do a Bride's Parents Give a Wedding Gift?
The etiquette of weddings is changing and so are the expectations of the bride's parents. In some cases, it may be appropriate...
How to Find People Who Give Away Money
You read about it in the paper, "Millionaire Helps Family in Hard Times." Wouldn't it be wonderful to find someone to help...