TAX BENEFITS MAY HELP DEFRAY THE COSTS
OF CARING FOR YOUR ELDERLY RELATIVE

As America ages, sons and daughters are increasingly called upon to help provide for frail parents and other elderly loved ones. If you're in that category, tax benefits may help defray your costs.

Dependency Exemptions:

In some situations, you may be able to claim a parent as a dependent. In addition, you might claim that a non-parent who lives in your home is a dependent.

Benefit: In 2003, a dependency exemption provides a $3,050 deduction.

Required: The person must be a US citizen or a resident of North America. He/she can't file a joint tax return, unless the return is filed only to receive a refund for taxes paid.

Two other criteria must be metŠ

Gross income. The dependent's gross income must be below $3,050 in 2003.

Support. You must provide over half of what it costs for that person to live during the year.

Multiple Support Agreements:

If you can't meet the support test, you still may qualify for the dependency exemption.

You and one or more siblings provide more than 50% support.

You can use a multiple support agreement to claim your parent as a dependent. Participating siblings can decide who will claim the exemption each year.

Note that high-income taxpayers lose most or all of the value of dependency exemptions, which phase out as adjusted gross income (AGI) tops certain thresholds.

Dependent Care Credit:

In addition to the dependency exemption, you might get a dependent care credit for a parent. Despite its name, the dependent care credit is not just for dependents. You can claim the credit for someone if you meet all the dependency tests except for gross income.

Medical Expenses:

You also may be able to add money you spend for a parent's medical expenses to your own itemized medical deductions. Such expenses might include the payment of a parent's long-term care insurance premiums, up to Tax Code limitations.

Caution: For these expenses to qualify, you must pay the bills directly. Don't give money to a parent so that he can pay.

The same standard applies here as it does for the dependent care credit. The person whose bills you pay must meet all the dependency tests, but not necessarily the one for gross income.

Head-of-Household Status:

If you're not married and you help to support a parent, you may claim head-of-household filing status.

Required: To qualify, you must provide over half of your parent's housing costs or nursing home bills. Alternatively, your parent can live with you for more than half the year.

Various other tax rules are much more favorable for head-of-household filers than for singles, so this can be a valuable tax break for those who qualify.

Start Financial Planning By Determining Net Worth

It's hard to plan where you're headed financially if you don't know where you are now.

Take the first step by mapping your balance sheet, tracking assets such as savings, investments and housing equity against your mortgage, credit card balances and other liabilities.

While 4 percent of U.S. households have more than $1 million in worth, the typical family is worth just $80,000.

A Web site run by the Consumer Federation of America Foundation makes it easy to fill in a net worth statement.

Go to www.americasaves.org, then click on "personal wealth estimator."

You can evaluate your current worth and can forecast where you might be in the future.

LOW-INCOME TAXPAYERS CAN GET A SPECIAL TAX CREDIT

A non-refundable special tax credit is available to low income taxpayers who contribute to a pension plan.

The credit is applied after use of the child care credit and child tax credit since the special credit cannot acreate a refund.

The credit is based on modified adjusted gross income (MAGI) and filing status.

If a taxpayer is contributing to a qualified pension plan and their MAGI is low enough, he or she is eligible for the credit. Qualified plans include 401(k), 403 (b), SIMPLE, SEP, regular IRA, ROTH IRA, and any voluntary after-tax contributions to a qualified retirement plan. Students are not eligible.

Taxpayers must be at least 18 years old.

The credit, only in effect for years 2002 to 2006, will reduce AMT. See IRS Announcement 2001­106 for all the rules. Apply for the credit on Form 8880.

The instructions and the form itself will guide you.

SURVEY SHOWS AMERICANS ARE UNAWARE OF LONG-TERM CARE

In a recent national survey of people 45 or older, the following was reported.

• 30% said they had long term care insurance (the actual percentage is 6%)
• 55% said Medicare pays for long stays in nursing homes (it pays for 100 days maximum which is just over 3 months)
• 25% believe that Medicare will pay for assisted living (it does not)
• 15% knew that the national average cost for a nursing home was $4600 per month (here in Arizona it is a little over $3000)

It is important for you to review your options for long term care coverage, whether it is through your employer or through your own private coverage.

I am available to assist you in this area of planning.

IRS IS TARGETING MORE WEALTHY TAXPAYERS IN RECENT AUDITS

The Internal Revenue Service flexed its financial muscles last year by auditing more high-income taxpayers in a stepped-up effort to snare tax cheats, the agency said.

After years of cutting enforcement activity to focus on making itself more customer-friendly, the IRS has vowed to hire thousands of new auditors and criminal investigators to review corporate finances, high-income taxpayers and offshore tax evasion schemes.

The IRS said its more aggressive efforts should allow it to capture some of the $250 billion each year in revenue that is lost.

The IRS audited 139,379 taxpayers with incomes of more than $100,000 in fiscal 2003, an increase of 24 percent from the prior year.

Overall, audits of all taxpayers jumped 14 percent to 849,296, yielding $35.5 billion in revenue.

Mark Everson, the IRS commissioner, told reporters at the agency's headquarters that the reduction in enforcement efforts had sent the wrong message to taxpayers.

"This drawing down of enforcement (staff) has had a negative effect" on the public paying taxes, said Everson. "People have seen others get away with things they shouldn't have been able to," he said.

The IRS was required by Congress in 1998 to improve customer service after the agency was alleged to have violated taxpayer rights. But as the IRS pushed to improve service, its ability to nab violators through audits stumbled.

The IRS cut its enforcement staff to 19,285 in 2003, a drop of more than 25 percent from 1996, while boosting its taxpayer service division.

Even with its stepped-up enforcement activity, the IRS audited only 1.1 percent of those earning more than $100,000 last year, down from 3.2 percent in fiscal 1996. And among all taxpayers, only 0.7 percent had their tax returns reviewed, down from 1.7 percent in the mid-1990s.

"(Audit rates) are still too low. We need to do more and continue to increase it, particularly on the big income area," said Everson. "But I don't think it's necessarily the case that audits need to return to rates of 10 or more years ago."

In an effort to get tougher on tax evaders, the Bush administration has proposed increasing funding for the IRS in fiscal year 2005 by 4.9 percent to $10.7 billion, with most of the increase earmarked toward focusing on high incomes and corporations.

If the budget request is approved by Congress, the IRS could add 5,000 more jobs next year.