Is an in-law tax-deductible?
Q: In June, my husband’s 93-year-old mother moved into our home. She has savings, money market and checking accounts, a small pension and monthly Social Security check. Since she has lived with us, her income is used for her medicine and personal expenses. She will soon be attending a senior daycare facility on a daily basis so that my husband and I can work. The monthly cost for this facility is more than her monthly income. We will be responsible for a portion of the daycare expenses, as well as all her medical and personal expenses. In addition, we have had a lift installed in our home ($12,000) so she can have access to the second floor, where the bedrooms are located. Can I claim my mother-in-law as a dependent? Are any expenses for her care deductible?
A: Generally speaking, you can claim your mother-in-law as a dependent if you provided more than half her support for this year. The only way to know if you meet this test is to hire a tax adviser who can review your specific situation. That person should be a CPA, tax attorney or EA (enrolled agent) and should sign your tax return; doing so would require him or her to own the error if there is one, and these folks are the only ones who can represent you in dealings with the IRS.
Q: Have you found in your experiences that people find it difficult to contribute the maximum to a 401(k) because of the cost of living (housing, kids in college, etc.)?
A: People use the cost of living as their reason for not contributing the maximum to their 401(k), but that’s all that is ‘ an excuse.
I’ve had people say to me, ‘I cannot afford to take 1 or 10 percent of my pay and put it into my 401(k) because I don’t make enough money. My bills are just too high.’
Usually, these very same people subscribe to cable TV, eat out two or three meals a day and own several vehicles. They are making choices, but they are simply making bad choices.
To all these people, I offer a simple game plan: Walk up to your spouse, look him or her in the eye, and say, ‘Honey, I’m sorry that we won’t be able to retire, but it’s more important that we watch HBO.’ Then call 911 or a divorce attorney.
Please accept the fact that, when it comes to retirement savings, you are on your own. Do not expect your employer to pay for your retirement. It’s not merely because employers can’t afford it. It’s also because your employer knows that you have no loyalty to the company. So why should it invest huge amounts of money into a pension program when it knows that you’ll just quit your job and move on, anyway?
I know your side of the story (which is valid): ‘Why should I be loyal to an employer when that employer does not guarantee me employment? They are likely to lay me off, or relocate my job, or outsource it to India!’ So why should you have any loyalty to the employer’?
Because of this disconnect, because of the elimination of the womb-to-tomb scenario, employers have said to their employees ‘ you are on your own. And employees have said to the employers, ‘I’m happy to be on my own; I am responsible for my future.’
But assuming such responsibility must include saving for your own retirement. So if your employer offers a 401(k), you must participate in the plan, to the maximum your employer allows. For most of us, that’s 10 to 20 percent of our annual pay. If you do not, your ability to retire will be in grave jeopardy.
Q: My son and three other college students recently formed a band and performed at a university event. The university told them that they want to make the $300 check payable to the band, rather than an individual band member, and suggested that they open a bank account in the band’s name. However, in order to do that I believe they’ll have to either obtain a taxpayer ID number for the band or use one of the member’s Social Security number. Is this correct?
They only anticipate performing for pay a handful of times before they graduate, so it seems like a lot of trouble to go through for a small amount of money. What is the best way to handle this situation?
A: The band should refuse the university’s request and have the fee paid to one of the band members instead. Since the fee is less than $600, no IRS Form 1099 needs to be issued.
If the school refuses, have the check made payable to ‘The John Smith Band’ ‘ John (a member of the band) will be able to deposit that check into his personal bank account. The other band members will have to trust him to pay them their shares. If the school insists on issuing a 1099, John might have to pay taxes; to adjust for this, he might reduce the amount he pays to the other band members.
Financial Adviser Ric Edelman is the author of several best-selling books. You can e-mail him at money@ricedelman.com.