As our life expectancy grows, so do the many issues of providing care for the elderly. Spouses and children of the elderly are faced with difficult choices in providing – and paying for – their care. These articles will highlight various elements of eldercare planning, helping you to understand the costs involved, the medical expenses that may be deducted, and the tax-free resources that are available.
Caring for an Elderly or Incapacitated Individual
Most of us will eventually find ourselves in the position of caring for an elderly or incapacitated loved one, as our average life expectancy continues to increase. Whether a spouse, elderly parent, or even a child, many tax implications should be considered, especially as some may relieve some of the financial burden associated with being a caregiver. Below are a few of the more common tax considerations of taking on the care of an elderly or incapacitated individual.
Deductions for Eldercare
Impairment-Related Medical Expenses
If you had to make changes to your home or install special equipment for the primary purpose of medical care for yourself, spouse, or a dependent, you may include these costs in your deductible medical expenses. Because some permanent improvements increase the value of your property, they may be only partly deductible. In this case you may determine the amount of your deduction by reducing the cost of the improvement by the increase in the value of your property.
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. Improvements that do not typically improve your property value include but are not limited to:
– Adding handrails or grab bars anywhere in the home
– Constructing entrance or exit ramps for the home
– Grading the ground to provide access to the residence
– Installing porch lifts and other forms of lifts (usually not elevators)
– Installing railings, support bars, or other modifications
– Lowering or modifying kitchen cabinets and equipment
– Modifying areas in front of entrance and exit doorways
– Modifying fire alarms, smoke detectors, and other warning systems
– Modifying hardware on doors
– Modifying stairways
– Moving or modifying electrical outlets and fixtures
– Widening doorways at entrances or exits to the home
– Widening or otherwise modifying hallways and interior doorways
Keep in mind that to deduct medical expenses, your deductions must be itemized. Deductible medical expenses are limited to those that exceed 7.5% of your AGI for the year, or 10% to the extent you are subject to the AMT.
You are probably able to claim the cared-for individual as your dependent which will qualify you for an exemption. In order to qualify:
– You (as an individual or through a multiple support agreement) must pay for more than 50% of the individual’s support costs
– The individual may not file a joint return for the year
– The individual must either live with you or be related to you
– The individual must be a U.S. citizen or a resident of the U.S., Canada, or Mexico.
Dependent Care Credit
If the cared-for individual lives with you, qualifies as your dependent, and is physically or mentally unable to care for themselves, you may qualify for the dependent care credit for costs you incur for their care to enable you and your spouse to go to work.
Exclusion for Payments Under Life Insurance Contracts
If you receive any lifetime payments under a life insurance contract on the life of a person who is either terminally or chronically ill, you may exclude that money from you gross income.
You may qualify for “head of household” status by virtue of the cared-for individual (if unmarried). You can qualify for this filing status if:
– the cared-for individual lives in your household (unless they are your parent)
– The individual is a relative
– the individual qualifies as your dependent
– you pay more than half the household costs
Life-Care Facilities Fee
Many retirement homes and care facilities require an up-front payment of a life-care fee or “founder’s fee.” Is that fee deductible as a medical expense?
Only the portion of this fee that can be properly allocated to medical care, in return for the home’s promise to provide lifetime care is deductible. The same applies to monthly fees paid under a life-care contract. The IRS has determined that the deductible portion of the life-care fee is calculated the same way regardless of the actual costs of the medical care provided. The fraction is determined on the basis of the facility’s own experience or that of a comparable facility.
There are two methods used in determining the portion of the total fee that is deductible as a medical expense.
– All of the facility’s direct medical expenses divided by its total expenses
– The portion of fees that the facility historically used to provide medical care divided by the entire fee
The facility should provide the allocation of the fee for the medical deduction at the time the fee is paid.
Payments made to a private institution for lifetime care, supervision, treatment, and training of a physically or mentally impaired child upon the parents’ death or inability to provide care are deductible medical expenses, but only if the payments are a condition for the institution’s future acceptance of the child and aren’t refundable as deductible medical expenses.
Living Cost Deductions
Usually, the entire cost of homes for the aged, assisted living facilities, and nursing homes are deductible as a medical expense provided that the primary reason for the individual living there is for medical care or due to the individual’s inability to care for themselves.
More and more people are choosing to hire day help or live-in employees to care for loved ones at home. In this case, the services provided by the employees must be allocated between household chores and deductible nursing services as only services such as bathing, feeding, dressing, and administering medication are considered medical expenses. General housekeeping services are not deductible as medical expenses, so only the portion of employee services which qualifies as medical care may be deducted.
If you hire employees to care for an individual at home, it is your responsibility to issue a W-2, obtain a Federal Employer ID number and state ID number, handle their payroll taxes, and withhold the employee’s share of Social Security and Medicare taxes. There are special rules for household employees which simplify these payroll withholding and reporting requirements and allow payroll taxes to be paid annually in conjunction with the employer’s individual 1040 tax return.
For assistance in setting up a household payroll, contact us today.
Provided they qualify as your dependent or medical dependent, you are permitted to include any medical expenses you incur while caring for the individual along with your own when you determine your medical deduction.
If the principal reason that a person stays at a nursing home is for medical (as opposed to custodial) care, any amounts paid to that home are fully deductible as a 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. Only the portion of the fee that is allocable to actual medical care qualifies as a deductible medical expense if a person isn’t in the nursing home mainly to receive medical care.
Reverse Mortgage as Alternative to a Nursing Home
In many cases it is preferable for an elderly individual to remain in their own home with proper in-home care instead of living in a nursing home. A reverse mortgage loan can make this a reasonable alternative; just don’t forget that the household help is deductible in the same manner as the nursing home and household employees must be paid by payroll.
Tax-Free Resources (Home Equity and Life Insurance)
Inflation, inadequate retirement planning, medical costs, retiring too early, and financial casualties can all strain the financial resources of elderly individuals. One (or both) of the following options may be considered to supplement their finances.
Home equity is a large asset, but selling the home isn’t always wise since elderly individuals may wish to remain in their home. Refinancing through a conventional loan can free up temporary funds, but they come with a repayment requirement, increasing the monthly commitments. Thus, this is often a counter-productive option.
A “Reverse mortgage” is a good option. It allows homeowners to borrow against the equity they have built up in their home without any current mortgage payments, all while remaining in their home.
If the homeowner dies, the heirs can pay off the debt by selling the home. Remaining equity (if there is any) goes to the heirs. If the loan balance is equal to or more than the value of the home, the repayment amount is limited to the value of the home.
To qualify for a Reverse Mortgage loan, the borrower must be at least 62 years old and have equity in the home. The borrower will have the choice of taking the loan as a lump sum, a line of credit, or as fixed monthly payments.
Life Insurance Contracts
If an individual is terminally or chronically ill and has life insurance, he or she is able to tap into their insurance death benefits while still living. This type of transaction is called a “viatical” settlement and is generally tax-free if the individual is certified to have a life expectancy of two years or less.
The policy owner would sell their policy to a third-party buyer who is then responsible for future premium payments, usually between 60% and 80% of the face value of the policy, and who will receive the proceeds of the insurance policy when the insured dies.