Caring for an Elderly or Incapacitated Individual

With people generally living longer, we frequently find ourselves in the position of a caregiver for elderly or incapacitated individuals. Whether the individual is an incapacitated or elderly spouse, an elderly parent or even a child, there are tax implications that need to be considered that can relieve some of the financial burden associated with being a caregiver. The following are some tax aspects of taking on the care of an elderly or incapacitated individual.
  • Dependency exemption - You may be able to claim the cared-for individual as your dependent, thus qualifying for an exemption. To qualify:
    o You individually or through a multiple support agreement must provide more than 50% of the individual's support costs,
    o The individual must either live with you for the entire year or be related,
    o For 2017, the individual must not have gross income in excess of the exemption amount of $4,050 (same as in 2016, call for exemption rates for other years),  
    o The individual must not himself file a joint return for the year, and
    o The individual must be a U.S. citizen or a resident of the U.S., Canada or Mexico. 
     
  • Medical expenses - If the cared-for individual qualifies as your dependent or medical dependent, you can include any medical expenses you incur for the individual along with your own when determining your medical deduction for itemized deduction purposes.

    Amounts paid to a nursing home are fully deductible as a medical expense if the principal reason that a person stays at the nursing home is for medical, as opposed to custodial, etc., care. If a person isn't in the nursing home principally to receive medical care, then only the portion of the fee that is allocable to actual medical care qualifies as a deductible medical expense. But if the individual is chronically ill (as defined below), all of the individual's qualified long-term care services, including maintenance or personal care services, are counted as medical expenses.

    A "Chronically ill person" is one who has been certified by a licensed healthcare practitioner within the previous 12 months as: (1) unable to perform at least two activities of daily living (eating, toileting, transferring, bathing, dressing, continence) without substantial assistance for a period of 90 days due to loss of functional capacity, (2) having a similar level of disability as determined in regulations, or (3) requiring substantial supervision to protect from threats to health and safety due to severe cognitive impairment. The requirement that a qualified long-term care insurance contract must base its determination of whether an individual is chronically ill by taking into account five activities of daily living applies only to (1) above (being unable to perform at least two activities of daily living). 
     
  • Reverse mortgage as alternative to nursing home - It is often desirable for an elderly person to remain in his or her own home with proper in-home care rather than entering a nursing home. A reverse mortgage loan may make this a feasible alternative to a nursing home. If this approach is taken, don't forget the household help is deductible in the same manner as the nursing home. In addition, household employees must be paid by payroll. 
     
  • Filing status - If you aren't married, you may qualify for “head of household” status by virtue of the cared-for individual. If the cared-for individual: (a) lives in your household for over half the year, (b) you pay more than half the household costs, (c) the individual qualifies as your dependent, and (d) is a relative, you can claim head of household filing status. If the person you're caring for is your parent, he or she does not need to live with you, as long as you provide more than half of the household costs and he or she qualifies as your dependent. For example, if a parent is confined to a nursing home and you pay more than half the cost, you are considered as maintaining a principal home for your parent. 
     
  • Dependent care credit - If the cared-for individual qualifies as your dependent, lives with you, and physically or mentally cannot take care of themselves, you may qualify for the dependent care credit for costs you incur for their care to enable you (and your spouse, if married and filing a joint return) to go to work. 
     
  • Exclusion for payments under life insurance contracts - Any lifetime payments received under a life insurance contract on the life of a person who is either terminally or chronically ill are excluded from gross income. A similar exclusion applies to the sale or assignment of a life insurance contract to a person who regularly buys or takes assignments of such contracts and meets other qualifying standards. 
If you are a caregiver and would like to discuss your situation further, please call this office.

Care for the Elderly

When the elderly reach the point that they can no longer care for themselves, there are generally two courses of action available to the caregiver: (1) Provide for in-home care, or (2) place the individual in a care facility. Each has its own distinct tax ramifications:
  • In-home Care - If the elderly person has the option to remain in their home and provide in-home care, that care is deductible as a medical deduction, provided the expenses are directly related to the individual's medical care. If the individual or individuals providing that care also provide household services, the cost must be allocated between deductible medical expenses and nondeductible personal expenses. The care provider need not be a nurse, even though they are providing services normally administered by a nurse. In-home care is subject to the rules for household employees that require the employer (the elderly individual) to withhold FICA and Medicare taxes and issue a W-2 at the end of the year. There are generally state filing requirements as well, so please call this office for assistance in setting up a household payroll. 
     
  • Care Facility - If the option is to place the elderly individual in a care facility such as a convalescent hospital, nursing home or a home for the elderly, then the cost of that care is deductible, provided the primary reason for being there is to receive medical care. If medical care is the primary reason, then the deduction will include the cost of lodging and meals (at 100%). 
In either case, the care-related expenses are added to the cost of other medical expenses for the year and the total is reduced by 10% (7.5% through 2016 for a taxpayer, or spouses if married filing jointly, age 65 or older) of adjusted gross income to determine the medical deduction allowed as part of itemized deductions.

Impairment-Related Medical Expenses

Amounts paid for special equipment installed in the home or for improvements may be included in medical expenses, if their main purpose is medical care for the taxpayer, the spouse, or a dependent. The cost of permanent improvements that increase the value of the property may be partly included as a medical expense. The cost of the improvement is reduced by the increase in the value of the property. The difference is a medical expense. If the value of the property is not increased by the improvement, the entire cost is included as a medical expense.

Certain improvements made to accommodate a home to a taxpayer's disabled condition, or that of the spouse or dependents who live with the taxpayer, do not usually increase the value of the home and the cost can be included in full as medical expenses. These improvements include, but are not limited to, the following items:
  • Constructing entrance or exit ramps for the home,
  • Widening doorways at entrances or exits to the home,
  • Widening or otherwise modifying hallways and interior doorways,
  • Installing railings, support bars, or other modifications,
  • Lowering or modifying kitchen cabinets and equipment,
  • Moving or modifying electrical outlets and fixtures,
  • Installing porch lifts and other forms of lifts but generally not elevators,
  • Modifying fire alarms, smoke detectors, and other warning systems,
  • Modifying stairways,
  • Adding handrails or grab bars anywhere (whether or not in bathrooms),
  • Modifying hardware on doors,
  • Modifying areas in front of entrance and exit doorways, and
  • Grading the ground to provide access to the residence.

Only reasonable costs to accommodate a home to a disabled condition are considered medical care. Additional costs for personal motives, such as for architectural or aesthetic reasons, are not medical expenses.

Keep in mind that taxpayers can only deduct medical expenses if they itemize their deductions. Medical expenses are only deductible if they exceed 10% (was 7.5% prior to 2013) of a taxpayer’s income (AGI), and then only the amount that exceeds that income limit is actually deductible. For seniors (age 65 or older and their spouses) the limitation remains at 7.5% through 2016. The table below reflects the AGI limitation for various years:

2012 & Before
2013-2016
After '16
Individuals Under the age of 65
7.5%
10%
10%
Individuals (and their spouses)
age 65 before close of year
7.5%
7.5%
10%
Alternative Minimum Tax Threshold
10%
10%
10%

Long - Term Care For Elderly

Many taxpayers as they get older acquire insurance to cover the costs of their care should they become chronically ill. This type of insurance is referred to as long-term care insurance and amounts paid for long-term care services and certain premiums paid on long-term care insurance are deductible as medical expenses on Schedule A. Costs of care provided by a relative who is not a licensed professional or by a related corporation or partnership don't qualify. The maximum amount of long-term care premiums treated as medical depends on the insured's age and is inflation-indexed annually. The following are the deductible amounts for the past few years. If the taxpayer paid long-term care premiums and qualifies for a medical deduction on Schedule A of their tax return, and did not include the long-term care premiums in their medical deduction, the return can be amended to include the deduction. Please call this office to see if the deduction will make a difference and to have us prepare the amended returns.


Deduction Limitations
Age
2014
2015
2016
2017
40 or less
370
380
390
410
41 to 50
700
710
730
770
51 to 60
1,400
1,430
1,460
1,530
61 to 70
3,720
3,800
3,900
4,090
71 & older
4,660
4,750
4,870
5,110
Per Diem 
330
330
340
360


Employees generally won't be taxed on the value of coverage under employer-provided long-term care plans. However, the exclusion doesn't apply if coverage is provided through a cafeteria plan. In addition, long-term care services can't be reimbursed tax-free under a flexible spending account.

The "long-term care contract" is an insurance contract that provides only coverage of long-term care and meets certain other requirements. Some long-term care riders to life insurance will also qualify. Benefits under a long-term care policy (other than dividends or premium refunds) are generally tax-free. For per-diem contracts that pay a flat-rate benefit without regard to actual long-term care expenses incurred, the inflation adjusted exclusion is limited to $360 a day in 2017 (up from $340 in 2016), except when long-term care costs incurred are more than the flat rate and are not otherwise compensated by some other means.

A contract isn't treated as a qualified long-term care contract unless the determination of being chronically ill takes into account at least five activities of daily living: eating,, toileting, transferring, bathing, dressing and continence.

"Long-term care services" include necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, maintenance or personal care services prescribed by a licensed practitioner for the chronically ill.

A "Chronically ill person" is one who has been certified by a licensed healthcare practitioner within the previous 12 months as: (1) unable to perform at least two activities of daily living (eating, toileting, transferring, bathing, dressing, continence) without substantial assistance for a period of 90 days due to loss of functional capacity, (2) having a similar level of disability as determined in regulations, or (3) requiring substantial supervision to protect from threats to health and safety due to severe cognitive impairment. The requirement that a qualified long-term care insurance contract must base its determination of whether an individual is chronically ill by taking into account five activities of daily living applies only to (1) above (being unable to perform at least two activities of daily living).

 


Medicaid and Eldercare

Generally, after an individual has used up all of their resources, Medicaid will step in to provide the ongoing care of the individual. Medicaid is usually a combined Federal and state program that pays for health and long-term care for eligible low-income citizens and legal residents of the United States.

It is not practical to explain all of the various states' programs. However, since they are generally combined Federal and state programs, there are similarities among the various programs. This article provides a brief overview of one state's program. A Directory of State sites allows you to review the rules for any particular state.

California's version of Medicaid is referred to as Medi-Cal and the following is an overview of the program's qualifications:

QUALIFYING FOR NURSING HOME STAY - In order for Medi-Cal to pay for a nursing home stay, the patient:

  1. Must be admitted on a doctor's order, 
  2. The stay must be medically necessary, and 
  3. With incomes from any source are allowed to keep only $35 per month for personal needs. Patients with no income receive an SSI grant of $40 per month for their Personal Needs Allowance (PNA). 
  • Patients who own their own home - Medi-Cal recipients in nursing homes who own their own homes (which may be multiple dwelling units) remain eligible for Medi-Cal as long as:
    a. They intend to return home; or
    b. The residence is used by a spouse and/or dependent relatives; or
    c. The residence is used by a sibling or adult child who lived there at least one year before the owner entered the nursing home; or
    d. They make a good faith effort to sell the home. Persons not capable of making a good faith effort to sell (for instance, those who need conservatorships) remain eligible for Medi-Cal. In that case, bona fide steps have to be taken so that someone else can sell the home.
     
  • Married Couples - Couples do not have to spend all their resources in order for one spouse to be eligible for Medi-Cal coverage in a nursing facility. The person going into the nursing facility can transfer his or her interest in the home to the spouse remaining at home without affecting Medi-Cal eligibility. A couple also may divide its non-exempt property, so that the spouse at home may keep up to $2,931* a month of the couple's income and up to $117,240* of the other assets for his/her needs. The spouse at home may also keep any independent income. A couple may divide their property however they wish. In determining eligibility under the spousal impoverishment provisions, Medi-Cal counts the property held in the name of either or both spouses. As soon as the countable non-exempt property is below $117,240* ($2,000 which can be retained by the institutionalized spouse), the county can establish initial eligibility. The couple then has at least 90 days to transfer everything but $2,000 into the name of the non-institutionalized spouse. The non-institutionalized spouse may retain all of the income that he or she receives in his or her own name. Consult legal services or a private attorney familiar with Medi-Cal law if either you or your spouse may need nursing facility care. 
FINANCING NURSING HOME CARE - Generally, a nursing facility's administration will help determine if the patient is eligible for Medi-Cal to pay the costs of the nursing home. If not, they can explain under what conditions the patient may become eligible in the future. The law requires that nursing home residents receive identical treatment regarding transfer, discharge, and provision of services regardless of the source of payment. A Medi-Cal resident can stay in any bed in a nursing facility.

Spousal Impoverishment Provision - Couples looking at nursing home placement for a spouse need to be aware of the special laws enacted that allow the spouse remaining at home to keep a certain amount of income and resources when the other spouse enters a nursing home. This is intended to prevent impoverishment of the spouse at home.
  • Community spouse's monthly maintenance needs allowance: The spouse at home may keep all of the couple's income up to $2,931* per month. This is called the community spouse's "monthly maintenance needs allowance". Note: This amount is adjusted annually by a cost of living increase. The spouse at home may obtain additional income or resources through a "fair hearing", or by court order. If the spouse at home receives income above the limit in his/her name only, he/she can keep it all (this is called the "name on the instrument rule"); however, he/she will not be allowed to keep any of the nursing facility spouse's income. Income received by the nursing facility spouse will go to his/her share of cost. The spouse in the nursing home is allowed to keep $35 monthly for personal needs ("personal needs allowance"). 
     
  • Resources: The spouse at home can keep up to $117,240* in resources, and the institutionalized spouse may keep up to $2,000. (Different laws apply to spouses who entered a nursing facility before September 30, 1989. If this is the case, the individual should contact a lawyer/advocate knowledgeable about this area of the law.) Both separate property (i.e., from a previous marriage or inheritance) and community property that is not exempt are combined and counted at the time of application for Medi-Cal. Once the resource limit has been reached, all ownership interest should be transferred to the spouse at home. The institutionalized spouse's $2,000 resource limit should be kept separately and accounted for separately.

    *The values are periodically adjusted for inflation. The amounts listed were effective 1/1/2014. 
TRANSFER OF ASSETS - Institutionalized Medi-Cal recipients or applicants who transfer non-exempt assets for less than fair market value during a 30-month "look back" period may be subject to a period of ineligibility. The length of the ineligibility period depends on the value of the transferred asset or resource and date of transfer period. The period of ineligibility begins on the date the transfer was made. The 30-month "look back" period begins when an institutionalized person applies for Medi-Cal or when a Medi-Cal recipient is admitted to a nursing facility. A 60-month "look back" period for assets from certain trusts is also required. Federal law amended trust regulations makes it more difficult to set up a Medicaid qualifying trust for eligibility and estate claims purposes. For a trust already established, it is recommended that an attorney review it.

Eldercare Can Be a Medical Deduction

With people living longer, many find themselves becoming the care provider for elderly parents, spouses and others who can no longer live independently. When this happens, questions always come up regarding the tax ramifications associated with the cost of nursing homes or in-home care.

Generally, the entire cost of nursing homes, homes for the aged, and assisted living facilities are deductible as a medical expense, if the primary reason for the individual being there is for medical care or the individual is incapable of self-care. This would include the entire cost of meals and lodging at the facility. On the other hand, if the individual is in the facility primarily for personal reasons, then only the expenses directly related to medical care would be deductible and the meals and lodging would not be a deductible medical expense.

As an alternative to nursing homes, many elderly individuals or their care providers are hiring day help or live-in employees to provide the needed care at home. When this is the case, the cost of services provided by the employees must be allocated between non-deductible household chores and deductible nursing services. To be deductible, the nursing services need not be provided by a nurse so long as the services are the same services that would normally be provided by a nurse, such as administering medication, bathing, feeding, dressing, etc. If the employee also provides general housekeeping services, then the portion of the employee's pay attributable to household chores would not be a deductible medical expense.

Household employees, like other employees, are subject to Social Security and Medicare taxes, and it is the responsibility of the employer to withhold the employee's share of these taxes and to pay the employer's payroll taxes. Special rules for household employees greatly simplify these payroll withholding and reporting requirements and allow the Federal payroll taxes to be paid annually in conjunction with the employer's individual 1040 tax return. Federal income tax withholding is not required unless both the employer and the employee agree to withhold income tax. However, the employer is still required to issue a W-2 to the employee and file the form with the Federal government. A Federal Employer ID Number and a state ID number must be obtained for reporting purposes. Most states have special provisions for reporting and paying state payroll taxes on an annual basis that are similar to the Federal reporting requirements.

If you need assistance in setting up a household payroll, please contact this office for additional details and filing requirements.

 

Medical Dependents

Medical expenses paid for dependents may be deducted. To claim these expenses, the person must have been a dependent either at the time the medical services were provided or at the time the expenses were paid. The qualifications for a medical dependent are less stringent than those for a regular dependent.

A person generally qualifies as a dependent for purposes of the medical expense deduction if:

1. That person lived with the taxpayer for the entire year as a member of the household or is related,

2. That person was a U.S. citizen or resident, or a resident of Canada or Mexico for some part of the calendar year in which the tax year began, and

3. The taxpayer provided over half of that person's total support for the calendar year. Medical expenses of any person who is a dependent may be included, even if an exemption for him or her cannot be claimed on the return.

Medical Expenses Under a Multiple Support Agreement - Under the provisions of a multiple support agreement, only the one who is considered to have provided more than half of a person's support under such an agreement can deduct medical expenses paid, but only the medical expenses actually paid by that individual count. Any medical expenses paid by others who joined in the agreement cannot be included as medical expenses by anyone.

Support Claimed Under a Multiple Support Agreement

A multiple support agreement is used when two or more people provide more than half of a person's support, but no one alone provides more than half. Whoever is considered to have provided more than half of a person's support under such an agreement can deduct medical expenses paid.

Any medical expenses paid by others who joined in the agreement cannot be included as medical expenses by anyone.

Nursing Services

Wages and other amounts paid for nursing services can be included in medical expenses. Services need not be performed by a nurse as long as the services are of a kind generally performed by a nurse. This includes services connected with caring for the patient's condition, such as giving medication or changing dressings, as well as bathing and grooming the patient. These services can be provided in the home or another care facility.

Generally, only the amount spent for nursing services is a medical expense. If the attendant also provides personal and household services, the total expense amount must be divided between the times spent performing household and personal services and the time spent for nursing services. However, certain maintenance or personal care services provided for qualified long-term care can be included in medical expenses.

Part of the amounts paid for that attendant's meals are also included in medical expenses. Divide the food expense among the household members to find the cost of the attendant's food. If additional amounts for household upkeep were paid because of the attendant, include the extra amounts with the medical expenses. This includes extra rent or utilities paid because a larger apartment was needed to provide space for the attendant.

Additionally, certain expenses for household services or for the care of a qualifying individual incurred to allow the taxpayer to work may qualify for the child and dependent care credit. But the same expenses can’t be used as both medical expenses and for the dependent care credit.

The employer’s share of payroll taxes related to the wages for nursing services are includible as a medical expense or for the dependent care credit, whichever is claimed.

Household Employee Wage Reporting – Are You Liable?

If you employ someone who works in your home, you may be subject to household employment taxes. This tax is sometimes referred to as the “Nanny Tax,” which is misleading because it also applies to a nurse, caregiver, maid, gardener, etc. This is the same tax that you may have read about where some politicians and people in high places have been brought to task for avoiding.

Not all those hired to work in a taxpayer’s home are considered household employees. For example, an individual may hire a self-employed gardener who handles the yard work for a taxpayer and other residents in the neighborhood. The gardener supplies all the tools and brings in other helpers needed to do the job. Under these circumstances, the gardener isn’t an employee, and the person hiring him/her isn’t responsible for paying employment taxes. Another example of a worker who is not considered a taxpayer’s employee is one who comes from an agency (if the agency is responsible for the work and how it is done).

It depends greatly on the circumstances, and the amount of control that the hiring person has over the job and the hired person, on whether or not a household worker is considered an employee. Ordinarily, when someone has the authority to tell a worker what needs to be done and how the job should be done, that worker is considered an employee. Having a right to discharge the worker, supplying tools and providing the place to perform a job are primary factors that show control.

Contrast the following example to the self-employed gardener described earlier. The Smith family hired Lynn to clean their home and care for their three-year old daughter, Lori, while they are at work. Mrs. Smith gave Lynn instructions about the job to be done and how to do the various tasks; she, rather than Lynn, had control over the job. Under these circumstances, Lynn is a household employee, and the Smiths are responsible for withholding and paying certain employment taxes for her. It would not matter whether Lynn worked full- or part-time, nor whether the job was paid on an hourly, daily, weekly or per-job basis. Lynn would still be the Smiths’ employee.

You are not required to withhold federal income taxes if you employ someone who is subject to the “Nanny Tax.” However, income taxes can be withheld if your employee asks you to do so and you are willing to do the additional paperwork and make the required payroll deposits.

You are required to withhold and pay FICA (social security and Medicare) taxes if your household worker earns cash wages of $2,000 or more (excluding the value of food and lodging) during the calendar year (amount is for 2016 and 2017; call for threshold amount for other years). If you reach the threshold, the entire wages (not just the excess) will be subject to FICA. However, if your employee is under age 18 and the services are not the employee’s principal occupation, you don't have to withhold FICA taxes. For example, there is no FICA tax liability for the services of an employee, who is a student younger than 18 years old and babysits or mows the lawn on a part-time basis. On the other hand, if the employee is under age 18, and the job is the employee’s principal occupation, you must withhold and pay FICA taxes when the threshold is exceeded.

If there is some uncertainty as to whether your household employee’s earnings will be under the withholding threshold, you should withhold the FICA from the beginning of the employment. If it turns out that the threshold is not met, then the withholding can later be refunded to the employee. On the other hand, if you did not withhold initially and the employee’s wages do reach the threshold, make up amounts can be withheld from the pay later on. This may create a problem in that the employee won’t appreciate large unexpected withholding amounts from his or her subsequent pay. You have the option of paying the FICA withholding yourself, but it must be imputed as part of the employee’s payroll.

In addition to withholding the employee’s share of the FICA, you, as an employer, are responsible for paying a matching amount. The FICA tax is divided between social security and Medicare. The social security tax rate is 6.2%, and the Medicare tax rate is 1.45%. These rates apply to both the employee and employer for a total tax rate of 15.3%.

Example for 2015: You pay your employee $500 a week and do not withhold income tax. You must withhold a total of $38.25 ($500 x 6.2% plus $500 x 1.45%) for your employee’s share of FICA. Thus, your employee’s net paycheck would be $461.75 ($500 - $38.25). In addition, you must match the $38.25 for a total FICA tax of $76.50.

While unlikely that the annual compensation of any one of your household employees would exceed $200,000, you should be aware that in the event that it does, the employee’s share of the Medicare tax rate increases to 2.35% of the income over $200,000 for that year. The employer’s Medicare tax rate is not increased.

As an employer, you are also required to pay FUTA (federal unemployment) taxes if a total of $1,000 or more in cash wages (excluding the value of food and lodging) is paid to your employees in any calendar quarter of the year. This tax (maximum rate is 6.2%) applies to the first $7,000 of wages paid.

As a household employer, you generally are not required to file any of the usual employment tax returns that a business must file. Instead, obtain an employer identification number (EIN) from the IRS and include payment with your individual tax return (1040) using a Schedule H. However, if you own a business as a sole proprietor in which you have employees, you may include the taxes for your household worker(s) on the FICA and FUTA forms (Forms 940 and 941) that are filed for your business. In that case, the EIN from your sole proprietorship is used to report the taxes for your household employee(s).

You are also required to provide your employee with a Form W-2, if the employee’s wages are subject to FICA or income tax withholding, and file the W-2 with the Social Security Administration. It is also your responsibility to file the appropriate employment-related forms for your state of residence. And while not a tax matter, those individuals hiring a household worker must verify that the employee can legally work in the U.S., and then complete and retain the U.S. Citizenship and Immigration Services’ Form I-9.

Generally, a deduction is not allowed on your income tax return for the household employment taxes paid. However, if the wages paid to a household worker are for qualifying medical care of yourself, your spouse or dependents, or if the payments are eligible for the credit for child and dependent care expenses, you may include your portion of the employment taxes (in addition to the wages) when figuring the medical deduction or child/dependent care credit.

The reporting requirements for the “Nanny Tax” can be complicated. Please contact us if you need assistance or have questions.

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