Credits for Caring

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It's perhaps understandable if some members of the stressed-out sandwich generation, the name given to caregivers for both young children and aging parents, forget to file for every last tax-refund dollar to which they're entitled. According to a 2002 study from the General Accounting Office, the average taxpayer robs himself of more than $400 by missing deductions, credits and other breaks. But this year, thanks to 2001 tax reforms just now taking effect, there are some particularly valuable gimmes on the table — especially when it comes to elder care.

How do you qualify? You have to be able to claim your elderly parent or other relative as a dependent, explains Randy Gardner, a CPA and co-author of 101 Tax Saving Ideas. In order to do that, you have to provide more than 50% of the relative's support, and that person can't have 2003 income exceeding $3,050 (not including tax-free interest, disability compensation and Social Security income) or file a joint tax return with a spouse. With the credits, the income limit is waived for elder dependents incapable of self care. Once those tests are satisfied, here are the breaks to keep in mind:

DEPENDENT-CARE CREDIT Worth up to $2,100. You can take a tax credit of 20% to 35% (depending on your income) of the first $3,000 you spend on care for each of your first two dependents (in this case, children up to age 13 and elders) or $6,000 total. To qualify for the credit, the money you spend must be used to allow you to work. So if you have elderly dependents, you can get credit for nursing and day-care programs, explains Eileen Brewer, a tax adviser at H&R Block.

FLEXIBLE-SPENDING ACCOUNTS Worth up to about $2,000. Just as there are flexible-spending accounts for health care, there are flexible-spending accounts for dependent care. You can fund this account with up to $5,000 pretax annually and then use the money to pay for elder and child care. The tax calculations get a little tricky, says Gardner, because you can't take advantage of both the full dependent-care credit and the full dependent-care account. The amount of dependent-care credit you have available gets reduced by the amount you put in a dependent-care account — so if you fund the account with the full $5,000, you have $1,000 of expenses left upon which to take the credit. The downside: as with all flexible-spending accounts, if you don't spend the money, you lose it.

SHARING CARE EXPENSES If no one person in your family provides more than 50% of support but you provide that much collectively, you can take turns claiming your elder as a dependent. You'll need to fill out IRS form 2120, a Multiple Support Declaration. Each person who provides more than 10% of support will have to sign the document. Think of it as one more reason to keep bouts of sibling rivalry at bay.

You can e-mail Jean, a money columnist, at moneytalk@moneymail.com