What To Consider If You Hope to Support Your Parents in Retirement
Growing up in a traditional Korean family, I've always learned to respect my elders and my parents (i.e., they always eats first, when they ask, you do, and accommodate their needs), and caring for my parents is part of the child's responsibility.
My parents have always worked extremely hard, rarely taking days off from work but sadly had a late start when saving for retirement. Due to this, my wife and I have considered the possibility of providing financial support during their retirement. Although not certain, we had to start thinking about what and how we can position ourselves in that event.
We are factoring the "what if" into our financial plan.
The first step is having a conversation with your parents on if support will be needed. Ask them about their confidence in their retirement plan and if they have any concerns. (This is likely a conversation they should have had with their financial advisor). Remember, caring for your parents can be a great life and financial commitment, and why it's important to factor this possibility into your financial plan and the "what if" scenario. Having a plan may suggest establishing a separate saving/investment account to help supplement their income needs and cover unexpected expenses. If you're planning to buy a new home, you may consider features to accommodate your parents better living with you. (i.e., completed basement, building a multi-generational home, in-law suite)
Naming parent's as dependent & tax benefits.
If you have children, you may be familiar with certain tax benefits for having kids (dependents). According to the IRS, your parents can also be claimed as dependents as long as they meet specific criteria, qualifying you for certain tax benefits. With current tax rules, naming parents as dependents, they must pass four requirements. (IRS List)
Parents must be qualified relatives.
Your parents must live with you all year as a member of your household
Your parent's gross income for the year must be less than $4,300 (2021).
You must generally provide more than half of a person's total support during the calendar year.
Claiming your parents as dependents allows for certain tax benefits:
Medical expenses deduction: if you pay for your parent's medical care, you may be able to claim medical expenses as an itemized deduction during the taxable year. Medical expenses include hospital stays, doctor visits, equipment, medications, and more. (You generally would take the greater of the itemized or standard deduction). However, to deduct these expenses, the total medical expense must exceed 7.5% of your adjusted gross income (AGI) to claim them.
Dependent care credit: First, credit is different than a deduction. A tax deduction reduces the amount of income to calculate your tax bill. A tax credit directly reduces your tax bill, dollar for dollar. If the qualifications are met, this credit may help to reduce your overall tax bill. The purpose of the dependent care tax credit is to give back a portion (as a tax credit) spent on care for your parents while you work or looking for work. (Remember that this also applies to children)
For more information, please reference IRS Publication 501, Dependents, Standard Deduction, and Filing Information.
Although the responsibility of caring for our parents and juggling our own family and financial complexities isn't stressful enough, it's essential to start planning early and to be familiar with certain tax benefits. The COVID pandemic brought the American Rescue Plan, which made some changes to the child and dependent care tax credit that can be claimed for 2021, please consult with a financial professional on the tax changes.
This blog post is not intended in any way as financial, legal, or tax advice.