5 Ways Family Caregiving Can Save You Money on Your Taxes

Here are five strategies that can make a difference:

1. Claim your 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 parent's total support for the calendar year. Also, your 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 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 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.