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Eldercare Can Be A Medical Deduction

People are living longer now than ever before.  Many individuals are serving as care providers for loved ones who cannot live independently. They often have questions regarding the tax ramifications associated with the cost of such care.

Because people are living longer now than ever before, many individuals are serving as care providers for loved ones (such as parents or spouses) who cannot live independently.  Such individuals often have questions regarding the tax ramifications associated with the cost of such care.  For these individuals, the cost of such care may be tax deductible as a medical expense.

Incapable of Self-Care – For the cost of caring for another person to qualify as a deductible medical expense, the person being cared for must be incapable of self-care.  A person is considered incapable of self-care if, as a result of a physical or mental defect, that person is incapable of fulfilling his or her own hygiene or nutritional needs or if that person requires full-time care to ensure his or her own safety or the safety of others.

Assisted-Living Facilities – Generally, the entire cost of care at a nursing home, home for the aged, or assisted-living facility is deductible as a medical expense, provided that the person who lives at the facility is primarily there for medical care or is incapable of self-care.  This includes the entire cost of meals and lodging at the facility.  On the other hand, if the person is living at the facility primarily for personal reasons, then only the expenses that are directly related to medical care are deductible; the cost of meals and lodging is not a deductible medical expense.

Home Care – A common alternative to nursing homes is in-home care, in which day helpers or live-in caregivers provide care within the home.  The services that these caregivers provide must be allocated into (nondeductible) household chores and (deductible) nursing services.  These nursing services need not actually be provided by a nurse; they simply must be the same services that a nurse would normally provide (e.g., administering medication, bathing, feeding and dressing).  If the caregivers also provide general housekeeping services, then the portion of their pay that is attributable to household chores is not deductible.

The emotional and financial aspects of caring for a loved one can be overwhelming, and as a result, caregivers often overlook their burdensome tax and labor-law obligations.  Sadly, these laws provide for no special relief from these tasks.

Is the Caregiver an Employee? – Because of the way that labor laws are written, it is important to determine if an in-home caregiver is an employee.  The answer to this question can be very subjective. Caregivers’ services can be obtained in a number of ways:

Agency-provided caregivers are employees of the agency, which handles all the responsibilities of an employer.  Thus, loved ones do not have any employment-tax or payroll-reporting responsibilities; however, such caregivers generally come at a substantially higher cost than others.

Self-employed caregivers pay all their expenses, are responsible for their own income reporting and taxes, and are not considered employees under federal or state law.  The IRS lists 20 factors that it uses to determine whether an individual is an employee; the main factors are financial control, behavioral control, and the relationship between the parties.  The household workers are typically classified as employees.

 Household employees are subject to Social Security and Medicare taxes.  The employer is  responsible for withholding the employee’s share of these taxes and paying the employer’s share of payroll taxes.  Fortunately for these employers, the special rules for household employees greatly simplify the payroll-withholding and income-reporting requirements.  Any resulting federal payroll taxes are 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 do so.  However, the employer is still required to issue a W-2 to the employee and to file that form with the federal government.  The employer also must obtain federal and state employer ID numbers for reporting purposes.  Some states have special provisions for the annual reporting and payment of state payroll taxes; these may be similar to the federal requirements.

The employer’s portion of all employment taxes (Social Security, Medicare, and both federal and state unemployment taxes) related to deductible medical expenses are also deductible as a medical expense.

You may be thinking, “Wait a minute – the household employers I know pay in cash and do not pay payroll taxes or issue W-2s to their household employees.”  This observation may be accurate, but such behavior is illegal, and it is not right to ignore the law.  Think about what could happen if one of your household employees is injured on your property or if you dismiss such an employee under less-than-amicable circumstances.  The household employee  could be eager to report you to the state labor board or  file for unemployment compensation.

Note,  that gardeners, pool cleaners and repair people generally work on their own schedules, invest in their own equipment, have special skills, manage their own businesses and bear the responsibility for any profit or loss.  Such workers are not considered household employees.

Here are some additional issues to consider: 

Overtime – Under the Fair Labor Standards Act, domestic employees are nonexempt workers and are entitled to overtime pay for any work beyond 40 hours in a given week.  However, live-in employees are an exception to this rule in most states.

Hourly Pay or Salary – It is illegal to treat nonexempt employees as if they are salaried.

Separate Payrolls – Business owners may be tempted to include their household employees on their companies’ payrolls.  However, any payments to household employees are personal expenses and thus are not allowable as business deductions.  Thus, business owners must maintain separate payrolls for household employees; in other words, personal funds (not business funds) must be used to pay household workers.

Eligibility to Work in the U.S. – It is illegal to knowingly hire or continue to employ an undocumented immigrant who is not legally eligible to work in the U.S.  When a household employee is hired to work on a regular basis, the employer and employee each must complete Form I-9 (Employment Eligibility Verification).  The employer must carefully examine the employee’s documents to establish his or her identity and employment eligibility.

The foregoing is only a general overview of the potential tax implications of eldercare.  If you have questions related to eldercare or about how your state deals with related employment issues – or if you would like assistance in setting up a household payroll system – please contact Hippo Tax Services for assistance.

Please check with your tax advisor, your Curran Wealth relationship manager, 
or contact Curran Wealth Management if you have any questions.
 518.391.4200 •
info@curranllc.com


The material contained in this article is for educational and informational purposes only.  The information herein is considered to be obtained from reference sources deemed reliable, but no representation or warranty is made as to its accuracy or completeness.  The contents of this article are based on the tax laws existing at the time of publication.  Tax laws are subject to continual change.  In addition, tax laws vary by state.  This article is not, and should not be regarded as tax advice.  The information contained in this article may not apply to your personal circumstances.  Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation.  If you would like a detailed analysis of your tax situation, with specific tax recommendations, you can discuss the possibility of pursuing a formal relationship with Hippo Tax Services.