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Tax Rules for Family Caregivers

A guide to what you can and can't deduct, plus traps to avoid

With Tax Day approaching (April 18 for most people this year), it’s the perfect time to examine the tax benefits and tax mistakes relating to family caregiving for an older loved one.

According to a 2013 Pew Research study, one in seven Sandwich Generation caregivers provide financial assistance to children over 18 and older parents. While many of them remember to claim their dependent children on their 1040s, they often forget or don’t realize they may also be able to take write-offs for the care of their parents.

Dependency Rules for Caregivers

It’s best to discuss any tax deductions and credits with a tax pro, review the rules in tax software or tax books or read up on them on the Internal Revenue Service (IRS) site. But here’s a brief guide to the basics.

Many family caregivers often forget, or don’t realize, that they may be able to take write-offs for the care of their parents.

To be eligible to deduct any 2015 caregiving costs you paid for a parent, parent-in-law, stepparent, grandparent, spouse, cousin, sibling, aunt or uncle:

  • You must have paid at least 50 percent of the costs of his or her care. Your loved one did not need to be living under your roof. For instance, your mother could have been in an assisted living facility, but you could have paid at least half of the costs of her medical care. The costs had to be medical (not custodial) diagnosis, treatment and cure expenses that were not covered by private insurance, Medicare or a Medicare supplement policy. Expenses that qualify include eyeglasses; adapters for phones or TV for the hearing impaired; therapeutic acupuncture; prescription drugs; walkers; artificial limbs and dentures. But meals and lodging can’t be included. These medical and dental costs must total more than 10 percent of your 2015 adjusted gross income (or more than 7.5 percent if you were 65 or older during the tax year).
  • The person you cared for can’t be claimed as a dependent of another taxpayer. But if multiple siblings provided financial assistance and the total meets the 50 percent requirement, then one of them may be able to claim the caregiving costs if he or she files a Multiple Support Declaration, IRS Form 2120, with the tax return and all the other parties agree.
  • The person you cared for was a U.S. citizen, U.S. national, U.S. resident or a resident of Canada or Mexico.
  • The person you cared for won’t file a joint return.
  • The person you cared for had gross income last year below the 2015 exemption amount. That means less than $4,000, excluding non-taxable Social Security income and disability payments.

Don’t Overlook These Deductions

If you and your loved one meet the criteria, you can then start toting up deductible expenses. Don’t overlook these:

Mileage driven for medical purposes Taking mom or dad to the doctor can add up. For 2015, the IRS allows a write-off of 23 cents per mile.

Travel This can be a particular cost burden for the nation’s 8 million long-distance caregivers. However, if the earlier criteria are met, you may be able to write off a percentage or set amount of your airfare and lodging related to medically necessary care.

Home improvements Costs incurred for a qualified dependent in your loved one’s home — or in your home if that person lived with you — may be deductible. Examples: ramps for wheelchairs, safety grab bars in showers and widening hallways for wheelchairs. It’s a good idea to have written documentation, whether that’s a doctor’s recommendation, a geriatric care manager’s care plan or a certified aging in place specialist’s (CAPS) list of necessary modifications, justifying the expense.

The amount paid for long-term care services or long-term care insurance This is a tax break caregivers often miss. Rehabilitation, therapeutic, preventative and personal care services qualify as long-term care services if a family member is chronically ill and the expenses are part of a plan set by a health care practitioner. The definition for chronically ill: the loved one couldn’t perform at least two activities of daily living — eating, toileting, bathing and dressing — without substantial assistance from someone else.

2 Tax Traps to Avoid

The flip side of forgetting that some caregiving costs can be deducted is running afoul of the IRS’s rules. Here are two of the biggest areas of confusion:

Hiring a home-care worker Family caregivers who also paid for in-home care last year need to be aware if the professional was a “Form 1099 contractor” or a “W-2 employee.”

According to Sherwin Sheik, CEO of CareLinx, the nation’s largest online caregiver marketplace, “If the family caregiver does not establish themselves as a domestic employer and issue a W-2 to the health care professional who has been paid more than $1,900 in 2015, that health care worker can go to their local employment office and file a claim against their employer (the family caregiver) and the family caregiver faces significant fines, penalties, back taxes owed and can be subjected to a long audit process.”

Some online home care agencies have been caught identifying workers as 1099 contract workers who should have been classified as W-2 employees; in the end, the financial and tax burden can fall on the family.

Being paid as a caregiver Many family caregivers wonder if they can be paid by a loved one for the assistance they provide. Some experts feel this means the family caregiver is “self employed” and therefore must file a tax return with that designation. Others say a special IRS ruling exempts a family member caring for a loved one from being considered “employed in trade.”

The IRS web site says that if you care for your parents in your home and they occasionally give you money to pay for their household expenses, that money is not taxable to you. It’s treated as support provided by your parents in determining whether your parents are your dependents.

Consult this IRS website page, Family Caregivers and Self-Employment Tax, for more details.

In some states, under Medicaid regulations, family caregivers can participate in a program sometimes called “patient-directed care” or “cash and counseling.” This means the care recipient can choose the care provider, who may be a family member and who can then get paid. However, regulations around wage limits, supervision and training and care provider and care recipient tax filings come into play. Check with the National Resource of Patient-Directed Services and talk to your tax pro.

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