Sandwich generation: stuck in the middle navigating tax benefits for children and parents
In 2012, 15 percent of middle-aged adults provided financial support to both an aging parent and a child, according to the Pew Research Center. This is the sandwich generation. They find themselves caring for their parents and children at the same time – and stuck navigating tax breaks for both.
It doesn’t take long for first-time parents to learn about the responsibilities – and the tax benefits – that come with parenthood. For example, just by having and supporting a kid, parents can exempt $4,050 per child from their taxable income. That dependent exemption would save someone in the 25 percent tax bracket more than $1,000.
And when taxpayers take care of their aging parents, their new responsibilities may come with similar tax breaks.
“Life gets complicated, as the sandwich generation knows, and taxes are no exception,” said Mike Slack, lead tax research analyst at The Tax Institute at H&R Block. “Tax benefits can help taxpayers take care of their parents and children, but the rules can be very complex.”
The child and dependent care credit
Parents raising young children may be able to claim the child care credit, which reduces parents’ taxes dollar for dollar for a percentage of qualifying child care expenses while they work or look for work. More than 6.3 million taxpayers claimed this nonrefundable credit in 2014, and with a $2,100 maximum credit for two eligible children, it can be a valuable way to help offset child care expenses.
But it also could be a way to offset the expenses that come with taking care of one’s aging parents. The credit is actually the child and dependent care credit – and for many in the sandwich generation, that could include one’s own parents.
“The sandwich generation may be paying for day care or after-school care for their child and paying a caregiver to come to their home to help take care of their own mother or father,” said Slack. “The child and dependent care credit could help them with both expenses.”
Taxpayers’ expenses to care for their own aging parents could qualify for the child and dependent care credit if the parents are physically or mentally incapable of self-care and lived with the taxpayers for more than half the year. Additionally, the taxpayers must be working or looking for work.
The parents do not need to be the taxpayer’s dependents for this credit. They do not need to meet the filing status and income questions to qualify as a dependent, but must otherwise be eligible to be claimed as a dependent.
The IRS has an interactive tool to help taxpayers determine if they can claim the child and dependent care credit, but if the situation is unclear, Slack suggests talking to a tax professional.
Medical expense deductions
If taxpayers are covering medical costs for their parents, they may be able to deduct some of those expenses. The requirements can be difficult to meet though: the medical costs must exceed 10 percent of the taxpayer’s adjusted gross income. And for this deduction, the parents must qualify as dependents.
An IRS questionnaire can help taxpayers determine if they can deduct their medical expenses. Taxpayers can also walk through whether or not they can claim their parent as a dependent in a separate questionnaire.
“Small changes in your and your parents’ circumstances can have a significant impact on your eligibility for tax benefits related to their care,” said Slack. “It’s important not just for taxpayers to know about the tax relief that may be available to them, but to know how they could qualify with some changes.”
Deciding who claims a child on taxes if not married, or if a married couple chooses to file separately, can be complicated.
With the child tax credit for 2018 doubling, the tax benefit of motherhood for some could be twice as nice.