As average life expectancies rise, and more and more American couples both work outside of the home, the costs related to the care for elderly parents is a significant factor in the family budget. The Internal Revenue Code provides some tax relief…at least it does for now. Here are some benefits to consider.
Medical expenses incurred by you, your spouse, and dependents exceeding 10% of adjusted gross income (AGI) may be deductible as itemized deductions for a qualifying individual. For individuals 65 and older at the end of 2016, the deduction is the excess over 7.5% of AGI. If you not sure what your AGI is, think total taxable income and you should be close.
To be a qualifying individual:
The dependent must be a relative of the taxpayer or a member of his/her household
The dependent’s income must be below this year’s exemption amount ($4,050 for 2016)
The dependent cannot file a joint return
The dependent must be a U.S. citizen
Over 50% of the dependent’s support must be provided by the taxpayer
All five conditions must apply.
If your parent resides in a nursing home or other long-term care facility, expenses for qualified long-term care may be deductible as medical expenses. The facility should provide guidance for expenses medically necessary versus those incurred strictly for personal services. Qualified long-term care expenses include any preventive, diagnostic, therapeutic or rehabilitative services and maintenance or personal care services provided under a plan of care as recommended by a licensed healthcare practitioner for the benefit of a chronically ill individual.
A person is considered chronically ill when a licensed healthcare practitioner has determined that, within the last 12 months, the individual either requires substantial supervision due to cognitive impairment, or cannot perform (without assistance) at least two of the following activities of daily living:
Qualified long-term care can be provided in a location other than a facility. When an in-home attendant provides care, you may deduct the medical expenses.
A common tax problem is in determining if the in-home attendant is an employee or independent contractor. There are three primary categories for determining the difference between an employee and independent contractor:
Behavioral – Does the payor have the right to control how the worker does his/her job?
Financial – Does the payor control how the worker is paid, or whether expenses may be reimbursed?
Type of Relationship – Are there written contracts? Does the worker receive employee-type benefits, such as health insurance or vacation pay?
When the attendant is an employee, the payroll taxes (Social Security, FUTA, Medicare and state employment taxes) may be deductible as medical expenses. If an independent contractor, there may be Form 1099 requirements. As with a facility, the attendant’s time must be allocated between that which is medical versus personal. Because many mandatory registrations and filings are necessary to comply with federal and state payroll tax laws for collecting and remitting household employment taxes, you should seek guidance and advice from a tax advisor.
The Tax Warriors® at Drucker & Scaccetti understand the difficulties of navigating the complex world of taxation as it relates to healthcare. If you have questions about the expenses you incur for the care of your parents, or loved ones, call on us. We are always prepared to help.