December 11, 2014

Caring for an Elderly or Incapacitated Individual

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On December 22, 2017, The Tax Cuts and Jobs Act was signed into law. The information in this article predates the tax reform legislation and may not apply to tax returns starting in the 2018 tax year. You may wish to speak to your tax advisor about the latest tax law. This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.

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 the individual is an incapacitated or elderly spouse, an elderly parent or even a child, there are tax implications that need to be considered that 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 to claim the cared-for individual as your dependent, thus qualifying for an exemption. To qualify:

o You individually or through a multiple support agreement must provide more than 50% of the individual's support costs,
o The individual must either live with you for the entire year or be related,
o For 2017, the individual must not have gross income in excess of the exemption amount of $4,050 (same as in 2016, call for exemption rates for other years),
o The individual must not himself file a joint return for the year, and
o 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 dependent or medical dependent, you can include any medical expenses you incur for the individual along with your own when determining your medical deduction for itemized deduction purposes.

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 to actual medical care qualifies as a deductible medical expense. But if the individual is chronically ill (as defined below), all of the individual's qualified long-term care services, including maintenance or personal care services, are counted as medical expenses.

A "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).
Reverse mortgage as alternative to nursing 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 to live 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 to a 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 to enable 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 who is either terminally or chronically ill are excluded from gross income. A similar exclusion applies to the sale or assignment of a life insurance contract to a person who regularly buys or takes assignments of such contracts and meets other qualifying standards.