Eldercare as a Medical Deduction?

Oakland Tax Attorneys: Ainer & Fraker, LLP

With people living longer, many individuals find themselves becoming the care provider for elderly parents, spouses and others who can no longer live independently. When this happens, questions always come up regarding the tax ramifications associated with the cost of nursing homes or in-home care. 

Generally, the entire cost of nursing homes, homes for the aged, and assisted living facilities are deductible as a medical expense if the primary reason for the individual being there is for medical care or the individual is incapable of self-care. This would include the entire cost of meals and lodging at the facility. On the other hand, if the individual is in the facility primarily for personal reasons, then only the expenses directly related to medical care would be deductible, and the meals and lodging would not be a deductible medical expense.

As an alternative to nursing homes, many care providers are hiring day help or live-in employees to provide the needed care at home. When this is the case, the services provided by the employees must be allocated between household chores and deductible nursing services. To be deductible, the nursing services need not be provided by a nurse so long as the services are the same services that would normally be provided by a nurse, such as administering medication, bathing, feeding, dressing, etc. If the employee also provides general housekeeping services, then the portion of the employee’s pay attributable to household chores would not be a deductible medical expense.

Household employees, like other employees, are subject to Social Security and Medicare taxes, and it is the responsibility of the employer to withhold the employee’s share of these taxes and to pay the employer’s payroll taxes. Special rules for household employees greatly simplify these payroll withholding and reporting requirements and allow the Federal payroll taxes to be paid annually in conjunction with the employer’s individual 1040 tax return. Federal income tax withholding is not required unless both the employer and the employee agree to withhold income tax, but the employer is still required to issue a W-2 to the employee and file the form with the Federal government. A Federal Employer ID Number and a state ID number must be obtained for reporting purposes, and most states have special provisions for reporting and paying state payroll taxes on an annual basis similar to the Federal reporting requirements. Note: if the caregiver is hired through an agency, generally the agency is considered the employer.

To the extent the payroll taxes are for deductible nursing services, the employer’s portion of those taxes is also deductible as a medical expense.

Are You Helping Support Your Parents?

Bay Area Tax Attorneys – If you are helping support your parents, you may be having difficulty showing over half of the support for both, thus failing to qualify for the dependency exemptions (and for the beneficial head of household filing status if you are a single taxpayer).

You may overcome this problem by designating the support to only one of the parents.  This may allow you to claim at least one of the parents as your dependent and, if you are unmarried, allow you to file as head of household.

To qualify for the head of household filing status, a taxpayer must maintain a household that constitutes one or both of his or her parents’ principal abode, and at least one of the parents must be the taxpayer’s dependent, i.e., must individually have gross taxable income for the year of less than the personal exemption amount ($3,700 for 2011) and receive over half of his or her support from the taxpayer.  The taxpayer himself need not reside in the household he or she maintains for the parents.  The home could even be a retirement home or facility.

To accomplish this, the taxpayer must be able to provide proof that the support is for one of the parents only.  Otherwise, the support will be designated as a “fund” equally allocated to both.  The IRS suggests a notation on a check as an acceptable designation procedure.  It says, “Notations by the maker on support checks purporting to allocate funds to particular household members made payable to an individual having custody of a claimed dependent, will be regarded as evidence of actual support.”

Although having no effect on filing status, when several people together provide over 50% of support, all who provide more than 10% of the support can agree about which of them will claim the dependent.  Of course, the agreeing parties must also otherwise qualify to claim the dependent.  Each person who is relinquishing the dependent exemption must complete an IRS Form for attachment to the return claiming the dependent.

Limits on Health Care Insurance Issuers

Ainer & Fraker – Health Care Limits in Excess of $500,000

For services performed during that year, a covered health insurance provider isn’t allowed a compensation deduction for an “applicable individual” (officers, employees, directors, and other workers or service providers such as consultants) in excess of $500,000.

Eldercare & Planning

San Jose Tax Attorneys – Generally, after an individual has used up all of their resources, Medicaid will step in to provide the ongoing care of the individual.

Medicaid is usually a combined Federal and state program that pays for health and long-term care for eligible low-income citizens and legal residents of the United States.

It is not practical to explain all of the various states programs. However, since they are generally combined Federal and state programs, there are similarities among the various programs. This article provides a brief overview of one state’s program.

California’s version of Medicaid is referred to as Medi-Cal and the following is an overview of the program’s qualifications:

QUALIFYING FOR NURSING HOME STAY – In order for Medi-Cal to pay for a nursing home stay, the patient:

1. Must be admitted on a doctor’s order,

2. The stay must be medically necessary, and

3. With incomes from any source are allowed to keep only $35 per month for personal needs. Patients with no income receive an SSI grant of $40 per month for their Personal Needs Allowance (PNA). 

• Patients who own their own home – Medi-Cal recipients in nursing homes who own their own homes (which may be multiple dwelling units) remain eligible for Medi-Cal as long as:

a. They intend to return home; or
b. The residence is used by a spouse and/or dependent relatives; or
c. The residence is used by a sibling or adult child who lived there at least one year before the owner entered the nursing home; or
d. They make a good faith effort to sell the home. Persons not capable of making a good faith effort to sell (for instance, those who need conservatorships) remain eligible for Medi-Cal. In that case, bona fide steps have to be taken so that someone else can sell the home. 

• Married Couples – Couples do not have to spend all their resources in order for one spouse to be eligible for Medi-Cal coverage in a nursing facility. The person going into the nursing facility can transfer his or her interest in the home to the spouse remaining at home without affecting Medi-Cal eligibility. A couple also may divide its non-exempt property, so that the spouse at home may keep up to $2,739* a month of the couple’s income and up to $113,640* of the other assets for his/her needs. The spouse at home may also keep any independent income. A couple may divide their property however they wish. In determining eligibility under the spousal impoverishment provisions, Medi-Cal counts the property held in the name of either or both spouses. As soon as the countable non-exempt property is below $113,640* ($2,000 which can be retained by the institutionalized spouse), the county can establish initial eligibility. The couple then has at least 90 days to transfer everything but $2,000 into the name of the non-institutionalized spouse. The non-institutionalized spouse may retain all of the income that he or she receives in his or her own name. Consult legal services or a private attorney familiar with Medi-Cal law if either you or your spouse may need nursing facility care.

Click the following link to learn more about how to finance nursing home costs in our blog post entitled, Financing Nursing Home Care.

Smoking Cessation Programs

Ainer & Fraker, LLP – Smoking Cessation Programs deductible subject to AGI limitations

The IRS has ruled that unreimbursed amounts paid by taxpayers for participation in smoking-cessation programs and for prescribed drugs designed to alleviate nicotine withdrawal are expenses for medical care that are deductible subject to the AGI limitation. However, because of the prohibition of deductions for most non-prescription drugs, no deductions are permitted for the costs of nonprescription nicotine gum and certain nicotine patches.

Medical Expenses Related to Impairment

Ainer & Fraker, LLP – 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:

2012 & Before
2013-2016
After ’16
Individuals Under the age of 65
7.5%
10%
10%
Individuals (and their spouses)
age 65 before close of year
7.5%
7.5%
10%
Alternative Minimum Tax Threshold
10%
10%
10%

 

Tax Deductions for Weight-Loss Programs?

Bay Area Tax Attorneys – The expenses for certain weight-loss programs may be deducted as a medical expense. In order for uncompensated amounts paid by individuals for participation in a weight-loss program to be deductible, the program must be undertaken as treatment for a specific disease or diseases (including obesity) diagnosed by a physician.

The costs are not deductible by taxpayers who participate in weight-loss programs to improve their general health or appearance. The tax code treats obesity as a disease, and thus you can include in medical expenses amounts paid to lose weight if it is a treatment for a specific disease diagnosed by a physician. This includes fees paid for a membership in a weight reduction group and attendance at periodic meetings.

However, you cannot deduct the cost of diet food or beverages in medical expenses because the diet food and beverages substitute for what is normally consumed to satisfy nutritional needs. You can include the cost of special food in medical expenses only if:
1. The food does not satisfy normal nutritional needs,
2. The food alleviates or treats an illness, and
3. The need for the food is substantiated by a physician.

The amount you can include in medical expenses is limited to the amount by which the cost of the special food exceeds the cost of a normal diet.

The question always arises: why is the cost of the dietary meals and supplements not deductible? Recently, an individual who sells dietary meals and supplements wrote to his representative in Congress asking that very question. The Congressman raised this question with the IRS Office of Chief Counsel. The Chief Counsel’s office responded with the following:

The tax code provides a deduction for expenses paid for medical care of the taxpayer, his spouse, or a dependent; to the extent such expenses exceed the adjusted gross income. The tax code defines the term “medical care” as amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.

The code provides that no deduction shall be allowed for personal, living, or family expenses. Food is a personal item. Therefore, the cost of food is nondeductible. Meal replacements, diet foods, and supplements are substitutes for the food individuals normally consume. The costs of these items are nondeductible personal expenses under the tax code.

Based on the tax code, as outlined in the response above, IRS Publications and rulings generally take a very restrictive view of this deduction. Thus, in addition to no deduction being allowed for dietary meals and supplements, no portion of membership dues paid to a gym, health club or spa qualifies as a deductible medical expense in any case—even if the individual joined on the advice of a physician to lose weight to combat a disease.

Long-Term Medical Care Services

Ainer & Fraker – Amounts paid for long-term care services and certain premiums paid on long-term care insurance are deductible as medical expenses on Schedule A.

Costs of care provided by a relative who is not a licensed professional or by a related corporation or partnership don’t qualify. The maximum amount of long-term care insurance premiums treated as medical depends on the insured’s age and is inflation-indexed annually. The following are the deductible amounts for the past few years. If the taxpayer paid long-term care premiums and qualifies for a medical deduction on Schedule A of their tax return and did not include them in their medical deduction, the return can be amended to include the deduction. Please call this office to see if the deduction will make a difference and to have us prepare the amended returns.

Deduction Limitations
Age
2011
2012
2013
2014
40 or less
340
350
360
*
41 to 50
640
660
680
*
51 to 60
1,270
1,310
1,360
*
61 to 70
3,390
3,500
3,640
*
71 & older
4,250
4,370
4,550
*
Per Diem
300
310
320
*

 

Employees generally won’t be taxed on the value of coverage under employer-provided long-term care plans. However, the exclusion doesn’t apply if coverage is provided through a cafeteria plan. In addition, long-term care services can’t be reimbursed tax-free under a flexible spending account.

The “Long-term care contract” is an insurance contract that provides only coverage of long-term care and meets certain other requirements. Some long-term care riders to life insurance will also qualify. Benefits under a long-term care policy (other than dividends or premium refunds) are generally tax-free. For per-diem contracts that pay a flat-rate benefit without regard to actual long-term care expenses incurred, the inflation adjusted exclusion is limited to $320 a day in 2013 (up from $310 in 2012), except when long-term care costs incurred are more than the flat rate and are not otherwise compensated by some other means.

A contract isn’t treated as a qualified long-term care contract unless the determination of being chronically ill takes into account at least five activities of daily living: eating, toileting, transferring, bathing, dressing and continence.

“Long-term care services” include necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, maintenance or personal care services prescribed by a licensed practitioner for the chronically ill.

“Chronically ill person” is one who has 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 to (1) above (being unable to perform at least two activities of daily living). 

Health Care – Are You Covered?

Ainer & Fraker , LLP – By 2014, each state must establish an exchange to help individuals and small employers obtain coverage.  Benefit options will be in a standard format and a single enrollment form used for all policies.

Plans offered through an exchange must provide essential health benefits, limit cost sharing, and provide specified accrual benefits (i.e., the percentage amount paid the insurer).  Out-of-pocket deductibles are limited to caps for Health Savings Accounts and further limited to $2,000 ($4,000 for families) in the small group market.

Plans in the individual and small group markets use a metallic designation for the accrual benefits provided:

  • Bronze 60%
  • Silver 70%
  • Gold 80%
  • Platinum 90%