Caring for an Elderly or Incapacitated Individual

With individuals living longer, we frequently find ourselves in the position of caregiver for elderly or incapacitated individuals. Whether you’re caring for an incapacitated or elderly spouse, an elderly parent, or even a child, understanding potential tax advantages 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

Caring for an Elderly or Incapacitated Individual

You may be able to claim the cared-for individual as your dependent, thus qualifying for an exemption deduction. To qualify:

  • You must provide more than 50% of the individual's support costs,
  • The individual must either live with you or be related,
  • The individual must not have gross income in excess of the exemption amount prescribed by law,
  • The individual must not file a joint return for the year (unless neither spouse would have a tax liability if separate returns were filed and the joint return is filed only to claim a refund), and
  • 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 (2), you can include any medical expenses you incur for the individual along with your own when determining your medical deduction. 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 medical in nature, as opposed to custodial or other care. If a person is not in the nursing home principally to receive medical care, only the portion of the fee that is allocable to actual medical care qualifies as a deductible medical expense. However, if the individual is chronically ill, all of the individual’s qualified long-term care services, including maintenance or personal care services, are deductible.

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, (b) you pay more than half of the household costs, (c) the individual qualifies as your dependent, and (d) the individual 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 your parent’s 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 of the cost, you are considered as maintaining the principal home for your parent.

Household employee issues

If you hire individuals to help you care for an elderly or incapacitated individual in your home, you must treat them as employees, issue them a W-2 form, and withhold and remit certain payroll taxes to the IRS and your state. If you use a service company that sends its employees to provide care services, the service company will handle the payroll issue for these employees, relieving you of that responsibility. If you plan to hire help, please call this office to discuss your options in more detail.

Dependent care credit

If the cared-for individual qualifies as your dependent, lives with you, and physically or mentally cannot take care of him or herself, you may qualify for the dependent care credit for costs you incur for this individual’s care to enable you and your spouse to go to work. However, the same expense cannot be used as both a medical expense deduction and for the dependent care credit. If you experience financial difficulties in funding the care, the tax code provides some specialized relief as described below. Generally, these forms of relief should be considered only when no other reasonable alternatives exist.

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 that household help is deductible in the same manner as nursing home expenses. In addition, household employees must be paid by payroll.

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. The tax benefits and regulations related to caring for someone are complicated. If you are a caregiver and would like to discuss your situation and options further, please call our office.

Tax Tips For People 65+ And Family Caregivers

The {} tax season brings several changes that affect these people filing federal returns for {}, including higher standard deductions, elimination of the personal exemption, modified itemized deduction rules and a new dependent credit that can benefit family caregivers.

Here is what you need to know before filing your {} federal income taxes:

Increased Standard Deduction Amounts

Standard deduction amounts for tax year {} and NaN are listed below per filing status:

You can take the standard deduction or itemize on Schedule A, but you can’t choose both. If you don’t itemize deductions and are 65 or older, you may be entitled to a higher standard deduction. (See IRS Publication 554 to determine your standard deduction.)

Tax Credits for People 65+ and Caregivers

For {}, you can no longer claim a personal exemption deduction for yourself, a spouse or dependents.However, you may be able to save money on taxes if you qualify for a tax credit:

Creditable expenses include not only those incurred for actual physical care of the dependent but also ancillary “household” services like meal preparation and cleaning. Services outside the home qualify if they involve the care of a qualified child or a disabled spouse or dependent who regularly spends at least eight hours a day in the taxpayer's home. Payments to a relative also qualify for the credit unless the taxpayer claims a dependency exemption for the relative or if the relative is the taxpayer's child and is under age nineteen. No credit is allowed for expenses incurred to send a dependent to an overnight camp.

  • Child and Dependent Care Credit:

    The Household and Dependent Care Credit is a nonrefundable tax credit available to United States taxpayers. Taxpayers that care for a qualifying individual are eligible. The purpose of the credit is to allow the taxpayer (or their spouse, if married) to be gainfully employed. This credit is created by 26 U.S. Code (U.S.C) § 21, section 21 of the Internal Revenue Code (IRC).
  • Credit for the Elderly or the Disabled:

    You may qualify for this credit, which varies in amount according to filing status and income, if you were age 65 or older at the end of {}. For more information, see IRS Publication 554, pages 26-29.

Caregiver Tax Deductions

Which Form of Business to Choose

Prior to {}, if you were able to claim a parent as a dependent because you provided more than half their support, you could claim a personal exemption for that person. That’s changed for the {} tax year.

For {}, that personal exemption went away, but you still could benefit if you can claim a qualifying relative as a dependent. To claim caregiver and support deductions for qualified expenses for a relative, the person must either live with you as a member of your household all year or be a qualified relative who doesn’t live with you.

Qualified relatives who don’t have to live with you include your:

  • Child, stepchild, foster child or a descendant of any of them
  • Sibling, including half-siblings
  • Parent, grandparent or another direct ancestor
  • Niece or nephew
  • Aunt or uncle
  • Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law

You may be able to claim a deduction for qualified expenses for a qualifying relative who lived with you as a member of your household all year (or died in {} while living with you) if you provided more than half of that person’s total support and the person’s gross income for the calendar year wasn’t more than the amount prescribed by law. You must also meet other IRS eligibility requirements.

For more information on claiming a relative as a dependent, see IRS Publication 554, IRS Publication 501, page 15 and For Caregivers on the IRS website. Use the IRS’s Interactive Tax Assistant to determine who you can claim as a dependent.

Employment Taxes for Hired Caregivers

If you hired a private health aide or caregiver in {}, you may need to pay state and federal employment taxes if total compensation exceeds the amount prescribed by law. If you paid wages to a spouse, sibling or your child, you’re not required to pay employment taxes on those wages.

In addition to employment taxes, you’re also responsible for paying state unemployment taxes and, unless excluded by a mutual written agreement, state and federal withholding taxes. Generally, if an agency provided the worker, that person isn’t considered your employee for tax purposes. However, it’s important to confirm with the agency that it is responsible for all taxes.

For more information, see IRS Publication 926.

Deducting Medical Expenses

Individuals who itemize instead of taking the standard deduction can deduct only the amount of medical and dental expenses you paid for yourself or a qualifying relative that is more than 7.5% of your Adjusted Gross Income (AGI), a threshold reduced from 10% by the Tax Cuts and Jobs Act for the {} tax year.

Qualifying medical expenses include:

  • Amounts paid for inpatient hospital care
  • Medical insurance premiums
  • Nursing services. The services need not be performed by a nurse, if the services are of a kind generally performed by a nurse such as giving medication or changing dressings as well as bathing and grooming the patient. Nursing services can be performed in your home or another care facility
  • Qualified long-term care services
  • Certain amounts of long-term care insurance premiums
  • Qualified long-term care services
  • Home improvements for medical care purposes

For a complete list of qualifying medical expenses, see page 23 of the IRS Tax Guide for Seniors. For more information on medical expense deductions, see IRS Publication 502.

Deducting Long-Term Care Medical Expenses

You can include qualified long-term care services in medical expenses if the services were required for a chronically ill person and prescribed by a licensed health-care practitioner. A person is considered chronically ill if he or she is unable to perform at least two activities of daily living (eating, toileting, transferring, bathing, dressing and continence) or requires substantial supervision for health and safety due to cognitive impairment.

If you hire an in-home caregiver, Jenkins recommends getting a letter from your or your loved one’s doctor documenting the need for help.

That letter acts as an anchor for being able to deduct medical expenses, Make sure you also maintain some kind of log if you have a caregiver, showing that they help you with some kind of daily activities.

For more information on qualified long-term care medical expenses, see IRS Publication 554, page 24.

Deducting Long-Term Care Insurance

Individuals who itemize may be able to include qualifying long-term care insurance premiums paid during a taxable year among their other deductible medical expenses. The maximum amount of long-term care insurance premiums you can deduct per person is limited, though it rises each year with inflation:

The ability to claim this deduction depends upon the policy being tax-qualified. The good news is that nearly all long-term care insurance policies sold today are tax-qualified.

To find out if a policy is qualified, look on the first page of the insurance contract for this statement: “This policy is intended to be a federally tax qualified long-term care insurance contract under Section 7702(B)(b) of the Internal Revenue Code of 1986, as amended.”

Amounts received from long-term care insurance contracts are generally excluded from income, though amounts which exceed your actual expenses are potentially taxable. For more information, see IRS Publication 554, pages 15 and 24.

Multiple Support Agreement

When two or more people provide more than half of a qualifying relative’s support, only one of those people who individually provides more than 10% of that person’s support can claim the person as a dependent. The others must sign a statement agreeing not to claim the person as a dependent for the tax year. A multiple support declaration must be attached to the return of the person claiming the dependent.

For more information on the multiple support agreement, see IRS Publication 501 , page 20.

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