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If you’ve arranged for a caregiver to provide care for an aging, ailing relative, you might be overlooking tax breaks that could help cut costs. “It’s definitely missed a lot,” says Steve Dickey, co-owner of a Visiting Angels franchise in
Fredericksburg, Va. and a former H&R Blockexecutive, noting that he puts out an annual reminder to client families not to overlook a possible tax deduction for caregiving costs. Whether families contract with a caregiver service provider like Visiting Angels or hire an independent caregiver, the basic rules for snagging a deduction are the same. Here’s how it works.
Caregiver expenses can be deductible as medical expenses. That’s where the confusion starts. You might think caregiving is always a nondeductible personal expense, not a deductible medical expense, says Saul Brenner, a CPA with Berdon in New York City. But if a son hires a caregiver to take care of mom’s needs–reminding her when to take her meds, cooking a healthy meal, helping her bathe—then you may have the ability to get the deduction.
“There are pitfalls,” Brenner warns. (The biggest caveat: To the extent you have medical or long-term care insurance that covers these expenses, you can’t double dip and get a deduction too.) Then there’s an A and a B you have to meet. The person being cared for has to be considered chronically ill—that could be a diagnosis of dementia—and a licensed health care practitioner has to prescribe a plan of care. “You can’t just do it on your own, and argue that Aunt Jane needed to be watched,” Brenner says. “You’ve got to bring the relative to a physician and say, ‘We need you to prescribe a plan of care for our relative.’”
And there’s the medical expense deduction threshold. Medical expenses are deductible only to folks who itemize, and then only to the extent that the expenses exceed 7.5% of your adjusted gross income. As folks age and their out-of-pocket medical expenses go up, they are more likely to meet this threshold. What counts as caregiving expenses is pretty expansive: wages, employment taxes, meals, even utilities and rent for a larger apartment needed to house a live-in caregiver. If needed for a current condition, renovations to make your home accessiblecan also count towards the medical expenses deduction. So the dollars can really add up.
Example: In a recent case, Estate of Baral, the U.S. Tax Court ruled that $50,000 a 92-year-old Queens, N.Y. woman, Lillian Baral, paid to two in-home caregivers in the last year of her life counted as qualifying medical deduction expenses. The caregivers helped the woman with bathing, dressing, trips to the doctor, taking medications and transferring her to a wheelchair. Her doctor had diagnosed her with dementia, requiring assistance and supervision 24 hours a day for medical reasons, as well as for her safety. Baral had adjusted gross income of $94,229 so she [technically her estate] was allowed a deduction of $43,273, the amount paid for medical care that exceeds $7,067 (7.5% of her AGI). Baral wasn’t handling her own finances—she had given financial power of attorney to her brother who lived in Washington, D.C.—but he was paying for her care with her savings.
What if mom’s kids are paying for her care? If an adult child, say a son, paying for mom’s care pays for more than one-half of her support (total living costs), he may be able to claim her has a dependent on his tax return. That in turn also means he can deduct medical expenses for mom, including caregiving expenses, assuming the expenses are over the 7.5% floor of his adjusted gross income.
Another option: if his employer offers one, the son could open up a flexible savings account for dependent care (mom would have to be his dependent and live in his house for at least half the year). You can put in $5,000 pretax salary each year to pay for eligible dependent care expenses incurred that year. Typically these accounts are used for expenses for paying someone to watch your kids while you work, but they can work for “sitting” services for mom too. If you’re in the 40% combined federal and state income tax bracket, it’s like saving $2,000. There’s also the federal dependent care tax credit, but for high-income earners, the FSA gives you a bigger break.
Tricky stuff, and there are even more options. Some savvy boomers are starting to save for expected out-of-pocket healthcare expenses in retirement by stashing money into pretax health savings accounts as a tax-savvy way to prefund a healthcare retirement nest egg. Others are buying long-term care insurance and taking advantage of the fact that long-term care insurance premiums can be tax deductible. Having dealt with end-of-life care issues with his late father, Brenner notes that it doesn’t take long to spend a significant amount of money, so it pays to study up on the tax breaks now to plan for the future.
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