I am 88 years old. I had a stroke in December 2012. My total income for 2013 was $16,000 (Social Security $12,000 and Veterans Administration spousal Aid and Attendance $4,000). After a short hospital stay, coming back to live in my own home required a full time caregiver. My daughter quit her job to care for me. I gave her $22,000 in 2013 to supplement her lost income. Would it be correct that she report $13,000 as “gifted” money and $9,000 as “income” when filing her return? Also, do I need to file a tax return?
Based on the facts above and my interpretation:
You do not have to file a tax return for 2013.
Earned income is not a gift but it is possible to work around the earned income with some skill.
The first matter to address is the classification of the caregiver as an employee or an independent contractor for income tax purposes. Before the employer can know how to treat payments made to the caregiver, the employer must make a critical determination as to whether the caregiver is an independent contractor or an employee.
For federal tax purposes, there is an important distinction between an independent contractor and an employee. The classification as an independent contractor or employee affects how the federal income tax, Social Security, and Medicare taxes are paid, and how caregivers file their income tax returns. In addition, the classification affects the worker’s eligibility for employer Social Security contributions and Medicare benefits.
If the caregiver is classified as an employee, then the employer must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay state and federal unemployment taxes on the wages paid to the caregive and get workers compensation insurance.
To determine whether the employer must register and pay state unemployment tax for a caregiver, the employer can contact the appropriate state taxing authority. Internal Revenue Service Publication 926 contains contact information for the states. (http://www.irs.gov/pub/irs-pdf/p926.pdf.)
The first question that should be answered is "what does the $22,000 represent to your daughter?" If you paid the $22,000 to your daughter as true gift, then your daughter will not have gift income. If you paid your daughter to take care of you, then the $22,000 is earned income to your daughter. Splitting the amount you paid to your daughter will look suspicious to the IRS if this transaction comes under examination since it was all paid to your daughter by you in the same tax year, so it is best to treat the full amount as a gift or compensation.
Gifts are not taxable to your daughter, but they are taxable to you. The first $14,000 is excludable under the annual gift tax exclusion, and the next $8,000 paid as a gift by you is credited against your lifetime exclusion. If you go this route, then you should file a Form 709 gift tax return to report this gift. I always recommend that you file a tax return because it starts the statute of limitations with the IRS for assessment purposes. If you don't file a return, then the statute of limitations never runs and the IRS can come back and assess you additional taxes at any time (not just within the traditional 3-year time limit).
If you paid the $22,000 to your daughter as compensation to take care of you, then the question becomes whether your daughter is an independent contractor or an employee. If your daughter is an independent contractor, then the $22,000 should be reported to the IRS on a Form 1099. Consider executing an independent contractor agreement with your daughter to avoid any confusion with taxing authorities over your daughter's work status. Whether your daughter is an independent contractor or employee will depend on large part on the amount of control you exercise over her tasks (how, when and where she does things to take care of you).
If your daughter is your employee (because you exercise control over her job duties), then the $22,000 should be reported to the IRS on a Form W-2. You will also need to file a Schedule H to your Form 1040 to report the payroll taxes due on your daughter's wages. See IRS Publication 926 for more information about household employees (link enclosed below).
Finally, consider filing a tax return for yourself even if you don't need to. As mentioned above, filing a return will start the statute of limitations for the IRS (so the IRS will need to assess any additional taxes for you within 3 years after you file your return). The statute of limitation will never start if you don't file a return (so the IRS can assess additional income taxes to you at any time).
Any comments posted on this site are for your general information and are not a substitute for professional legal representation. Please read the disclaimer below.
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