Many people are finding themselves caring for elderly family members who can no longer live independently. This can be a challenging but rewarding experience. Along with the emotional considerations, there are also financial and legal aspects to consider. This article will explore some of the tax deductions available for elder care expenses, as well as the employment tax implications of hiring in-home caregivers.
Can I Deduct Eldercare Costs on My Taxes?
The good news is that some eldercare expenses may be deductible as medical expenses on your tax return. However, the deductibility hinges on whether your loved one meets the criteria for “incapable of self-care” and the nature of the care provided.
- Incapable of Self-Care: An individual is considered incapable of self-care if they cannot meet their basic hygiene or nutritional needs due to a physical or mental limitation, or require constant supervision to ensure their safety.
- Assisted Living Facilities: The full cost of care in a nursing home or assisted living facility may be deductible if the primary reason for residency is medical care or the inability to perform self-care. This includes meals and lodging. However, if the primary reason for residency is personal care (e.g., companionship), only the medical care portion of the cost is deductible.
- Home Care: In-home care provided by day helpers or live-in caregivers can be a good alternative to assisted living facilities. The key to deductibility lies in separating the cost of medical services (deductible) from household chores (non-deductible). Examples of deductible services include medication administration, bathing, dressing, and feeding.
Is My In-Home Caregiver an Employee?
Legally, there’s a chance your in-home caregiver is considered an employee, and labor laws come into play. How you obtain their services determines their employment status:
- Agency-Provided Caregivers: These caregivers are employees of the agency, eliminating your tax and payroll responsibilities but often coming at a premium cost.
- Household Workers: Generally classified as employees, triggering Social Security and Medicare taxes. However, there are simplified payroll-withholding and income-reporting requirements for household employers.
Important Note: It’s illegal to avoid paying employment taxes or provide false documentation for your in-home caregiver. They are entitled to worker’s compensation and unemployment benefits under certain circumstances
Additional Considerations
- Overtime Pay: Domestic employees working over 40 hours a week are entitled to overtime pay, with some exceptions for live-in caregivers (depending on your state).
- Hourly or Salary: Non-exempt employees (most caregivers) cannot be treated as salaried; they must receive hourly pay for overtime.
- Separate Payrolls: Business owners cannot include household employees on their business payroll. Household worker wages are personal expenses.
- Employment Eligibility: It’s illegal to knowingly hire someone unauthorized to work in the US. Form I-9 verification is required for regular household employees.
- Retirement Benefits: While not mandatory, employers can now offer retirement plans to domestic employees under a Simplified Employee Pension (SEP) plan.
Medical Dependent and Tax Deductions
Typically, medical expenses are deductible for yourself, spouse, or dependents. An exception exists for “medical dependents.” An individual who meets all dependency requirements except income or filing status can still qualify for medical expense deductions if you provide more than half of their financial support.
Conclusion
Caring for an elderly loved one can be a complex undertaking. There are many factors to consider, both financial and legal. By familiarizing yourself with the tax deductions available and the employment tax implications of hiring in-home care, you can help ensure a smoother experience for yourself and your loved one.
If you have questions about elder care or how the above applies in your specific situation, our team is here to help. Contact us today for expert guidance tailored to your unique situation.
