As the life expectancy of our population increases, so do the many issues of providing care for the elderly. Spouses and children of the elderly are faced with difficult decisions in providing their care. This section is provided to assist you with eldercare planning. It gives you an idea of the costs involved, medical expenses that may be deducted, and tax-free resources that may be available. For topics that are not covered here or to request a referral to other professions providing eldercare services, please give this office a call.
Caring for an Elderly or Incapacitated Individual
With people generally living longer, we frequently find ourselves in the position of a caregiver for elderly or incapacitated individuals. Whether it be an incapacitated or elderly spouse, an elderly parent or even a child, there are tax implications that need tbe considered and 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 - You may be able tclaim the cared-for individual as your dependent, thus qualifying for an exemption. To qualify:
- You individually or through a multiple support agreement must provide more than 50% of the individual's support costs,
- The individual must either live with you for the entire year or be related,
- For 2013, the individual must not have gross income in excess of the exemption amount of $3,900, up from $3,800 in 2012 (call for exemption rates for other years),
- The individual must not himself file a joint return for the year, 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 dependentor medical dependent, 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 for medical, as opposed to custodial, etc., care. If a person isn't in the nursing home principally to receive medical care, then only the portion of the fee that is allocable tactual medical care qualifies as a deductible medical expense. But if the individual is chronically ill, all of the individual's qualified long-term care services, including maintenance or personal care services, are deductible.
A "Chronically ill person" is one whhas been certified by a licensed healthcare practitioner within the previous 12 months as: (1) unable to perform at least two activities of daily living (eating, toileting, transferring, bathing, dressing, continence) without substantial assistance for a period of 90 days due to loss of functional capacity, (2) having a similar level of disability as determined in regulations, or (3) requiring substantial supervision to protect from threats to health and safety due to severe cognitive impairment. The requirement that a qualified long-term care insurance contract must base its determination of whether an individual is chronically ill by taking into account five activities of daily living applies only t(1) above (being unable to perform at least two activities of daily living).
Reverse mortgage as alternative tnursing 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 the household help is deductible in the same manner as the nursing home. In addition, household employees must be paid by payroll.
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 for over half the year, (b) you pay more than half the household costs, (c) the individual qualifies as your dependent, and (d) 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 tlive with you, as long as you provide more than half of the household costs and he or she qualifies as your dependent. For example, if a parent is confined ta nursing home and you pay more than half the cost, you are considered as maintaining a principal home for your parent.
Dependent care credit - If the cared-for individual qualifies as your dependent, lives with you, and physically or mentally cannot take care of themselves, you may qualify for the dependent care credit for costs you incur for their care tenable you ( and your spouse, if married and filing a joint return) to go to work.
Exclusion for payments under life insurance contracts - Any lifetime payments received under a life insurance contract on the life of a person whis either terminally or chronically ill are excluded from gross income. A similar exclusion applies tthe sale or assignment of a life insurance contract ta person whregularly buys or takes assignments of such contracts and meets other qualifying standards.
Care for the Elderly
When the elderly reach the point that they can no longer care for themselves, there are generally two courses of action available to the caregiver; (1) Provide for in-home care, or (2) place the individual in a care facility. Each has its own distinct tax ramifications:
- In-home Care - If the elderly person has the option to remain in their home and provide in-home care, that care is deductible as a medical deduction, provided the expenses are directly related to the individual's medical care. If the individual or individuals providing that care also provide household services, the cost must be allocated between deductible medical expenses and nondeductible personal expenses. The individual or individuals providing the care need not be a nurse, granted they are providing services normally administered by a nurse.
In-home care is also subject to the rules for household employees that require the employer (the elderly individual) to withhold FICA and Medicare taxes and issue a W-2 at the end of the year. There are generally state filing requirements as well, so please call this office for assistance in setting a household payroll.
- Care Facility - If the option is to place the elderly individual in a care facility such as a convalescent hospital, nursing home or a home for the elderly, then the cost of that care is deductible, provided the primary reason for being there is to receive medical care. If medical care is the primary reason, then the deduction will include the cost of meals and lodging and no adjustment is needed.
Impairment Related Medical Expenses
Amounts paid for special equipment installed in the home or for improvements may be included in medical expenses, if their main purpose is medical care for the taxpayer, the spouse, or a dependent. The cost of permanent improvements that increase the value of the property may be partly included as a medical expense. The cost of the improvement is reduced by the increase in the value of the property. The difference is a medical expense. If the value of the property is not increased by the improvement, the entire cost is included as a medical expense.
Certain improvements made to accommodate a home to a taxpayer's disabled condition, or that of the spouse or dependents who live with the taxpayer, do not usually increase the value of the home and the cost can be included in full as medical expenses. These improvements include, but are not limited to, the following items:
- Constructing entrance or exit ramps for the home,
- Widening doorways at entrances or exits to the home,
- Widening or otherwise modifying hallways and interior doorways,
- Installing railings, support bars, or other modifications,
- Lowering or modifying kitchen cabinets and equipment,
- Moving or modifying electrical outlets and fixtures,
- Installing porch lifts and other forms of lifts but generally not elevators,
- Modifying fire alarms, smoke detectors, and other warning systems,
- Modifying stairways,
- Adding handrails or grab bars anywhere (whether or not in bathrooms),
- Modifying hardware on doors,
- Modifying areas in front of entrance and exit doorways, and
- Grading the ground to provide access to the residence.
Only reasonable costs to accommodate a home to a disabled condition are considered medical care. Additional costs for personal motives, such as for architectural or aesthetic reasons, are not medical expenses.
Keep in mind that taxpayers can only deduct medical expenses if they itemize their deductions. Beginning in 2013, medical expenses are only deductible if they exceed 10% (was 7.5% in prior years) of a taxpayer’s income (AGI), and then only the amount that exceeds that income limit is actually deductible. For seniors (age 65 or older and their spouses) the limitation remains at 7.5% through 2016. The table below reflects the AGI limitation for various years:
Individuals under the age of 65
Individuals (and their spouses) age 65 before close of year
Alternative Minimum Tax Threshold
2012 & Before
2013 - 2016