Can I claim my mom with dementia as a dependent if I'm the annuity owner but she's the annuitant?

This is actually a common situation with annuities and family members with cognitive issues. Let me break this down for you: The annuity company is correctly reporting the income to you as the owner - that's how annuities work for tax purposes. The owner is responsible for the tax liability regardless of who receives the payments as the annuitant. For dependency purposes, you might be able to claim your mother as a qualifying relative if you meet several tests. The support test requires you to provide more than half of her support for the year. The good news is that you can include the value of the annuity payments in calculating your support contribution since you're legally the owner and being taxed on that income. You'll need to calculate the total cost of her support (housing, food, medical expenses, clothing, etc.) and determine if what you pay (including the annuity payments) exceeds 50% of that total. Also, her gross income (not counting tax-exempt income like certain Medicaid benefits) must be less than $4,700 for 2023. Given your situation, it does sound like you might qualify to claim her as a dependent, which would give you a dependency exemption and potentially qualify you for other benefits like the Credit for Other Dependents.

After struggling with a similar situation with my aunt's finances, I found taxr.ai https://taxr.ai to be incredibly helpful for sorting through dependency questions and tax implications of financial responsibility for family members. The site analyzed my documents and clearly explained which expenses could count toward the support test and how to document everything properly. I uploaded pictures of all the relevant documents - annuity statements, receipts for expenses I paid, and even her Medicare statements. Their system flagged several deductions I would have missed and explained exactly how to handle the support calculation when multiple income sources are involved.

Just wanted to follow up - I tried taxr.ai with my father-in-law's situation and it was exactly what I needed! I uploaded his 1099-R, my documentation of expenses I pay for him, and his Medicaid approval letter. The analysis showed I could claim him as a dependent even though I'm not the owner of his annuity (different from OP's situation). The system also flagged that I could claim some of his medical expenses on my Schedule A since I'm paying them, even if I couldn't claim him as a dependent. Turns out I was paying enough of his expenses to meet the support test, which I wouldn't have realized without going through their guided questions. The documentation they provided will be super helpful if I ever get audited. Definitely worth checking out for anyone dealing with elder care tax questions!

When I was dealing with my father's long-term care and all the tax headaches that came with it, I was spending HOURS trying to reach the IRS for clarification on dependency status with annuities. After weeks of busy signals and disconnections, I found Claimyr https://claimyr.com which got me through to an actual IRS agent in about 15 minutes. They have a video showing how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with explained exactly how to document the annuity payments as support for dependency purposes and confirmed that I was calculating everything correctly. Saved me thousands in taxes and a ton of stress wondering if I was doing things right.

I have to eat my words about Claimyr. After my skeptical comment earlier, I decided to try it anyway since I was desperate to resolve my tax question about my mother's care expenses. To my surprise, I got through to an IRS representative in about 20 minutes after trying unsuccessfully for weeks on my own. The agent confirmed that I could include the value of an annuity that was in my name (but paying to my mother) as part of my support calculation for claiming her as a dependent. They also walked me through exactly how to document everything in case of an audit. Just having clear direction from an official source was worth it. They even helped me understand how to handle the situation for next year when I plan to transfer the annuity back to her name with me as the power of attorney instead.

One thing nobody's mentioned yet - you should look into whether you qualify for the Child and Dependent Care Credit rather than just the dependency exemption. If your mom meets the requirements for being your dependent due to inability to care for herself (which sounds likely given the dementia), AND you're working or looking for work, some of the costs you're paying could qualify for this credit. It won't help with the annuity tax hit directly, but it might offset some of the increased tax burden if you're paying for her care so you can work.

Don't forget about the Medical Expense deduction! If you're itemizing deductions and paying medical expenses for someone who qualifies as your dependent (which sounds like your mom would), you can deduct those expenses that exceed 7.5% of your AGI. This could include portions of her assisted living costs that are for medical care, prescription medications, medical equipment, etc.