Salvaging Parent Exemptions

Tax Tip from the week of September 24, 2018

No exemption for your parent? No problem

Under recent tax legislation, you can no longer claim personal exemptions, including ones for your children and other relatives (now through 2025). That means if you’ve been claiming an exemption for an elderly parent you support, you will no longer be able to. But you still may be able to salvage a tax benefit if a parent watches your kids so you and your spouse can work.

How to salvage a tax benefit

Consider turning your support into payment for child care. In other words, instead of giving your parent support, you may decide to pay him or her to look after the kids. This may entitle you to a Child and Dependent Care Credit.

The credit is generally equal to 20 percent of child care expenses of up to $3,000 for one child under 13 for the year, or $6,000 for two or more qualified children. So the maximum credit is $600 (or $1,200, respectively).

Here’s an example: Say that you give your mother $1,000 a month to pay her rent. She watches your two kids after school while you and your spouse are working, but you don’t pay for the child care.

Previously, you’d claim a dependency exemption for your mother if you provided more than half her annual support and she had less than the personal exemption amount in gross income ($4,050 for 2017).

Although there are no exemptions in 2018, you can qualify for the Child and Dependent Care Credit if you switch things around. Simply pay your mom $1,000 monthly for child care when the kids go back to school in September instead of giving the $1,000 to her landlord.

The payments for the three remaining months in 2018 qualify for the Child and Dependent Care Credit. As a result, you can claim a $600 credit (20 percent of $3,000). Of course, the payments are taxable to your mother, but it’s likely she won’t owe any tax, anyway.

Keep in mind that the recent tax legislation also authorizes a $500 credit for supporting non-children dependents. This special credit is nonrefundable.

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