Hidden Tax and Financial Breaks for Children who are Caring for an Aging Parent
Caring for an aging parent is a difficult road for a child. It's hard to appreciate the potential emotional, physical, and financial toll until you have driven this road yourself. The financial costs for the caregiver child are hard to calculate. They can range from missed opportunities at work, through lost wages and the inability to work at all, to having to use up the child's income and savings to pay for Mom or Dad's care.
I'm a certified elder law attorney. For the past 30 years I have helped my clients find ways to minimize these financial burdens. There is an unfortunate lack of knowledge about a number of important tax and financial benefits that can accrued directly to the caregiver child rather than the care recipient. These financial breaks are relatively unknown even to tax and legal advisors. As a result they are woefully underutilized.
The purpose of this article is to shed light on 3 of these overlooked opportunities. Two of them are hidden gems that can provide many thousands of dollars in savings for the child who is a caregiver. Claiming a Dependency Exemption for your Parent Probably the best known (though not the most significant) potential tax break for a caregiver child is the federal income tax dependent exemption (IRC 151).
An exemption reduces your taxable income. You can take an exemption for yourself and for your spouse if you are married. You can also claim an exemption for other dependents such as children AND a parent who meets the dependency tests. In 2010 each exemption is worth $3,650, although the benefit is phased out for higher income taxpayers. Unfortunately, the rules make it difficult for a child to claim the exclusion for a dependent parent. You can only claim a federal income tax dependent exemption for a parent provided: your parent has less than $3,650 of income for the entire year (in 2010). Since taxable Social Security payments are included in the parent's income the $3,650 income limit prevents many children from claiming the exemption for a parent they are supporting.
If the parent is receiving support from several children none of which have provided over half the support the children can agree on which sibling is going to get to claim the exemption. The children do this through a multiple support agreement. For more information on the dependency exemption, see IRS Publication 501: Exemptions, Standard Deductions and Filing Information. Publication 501 includes a worksheet you can use to figure out whether you have provided more than half of your parent's support.
Deducting your Parent's Medical Expenses
Don't be discouraged if your parent has income in excess of $3,650 and you can't claim an exemption from them. A much more valuable tax break may await - the potential for the caregiver child to deduct the medical and qualified long term care expenses paid for the parent. Fortunately, the medical expense dependency/deduction rules are easier to meet than those for claiming a dependency exemption because you can deduct medical expenses even if your parent has income in excess of $3,650.
Tax law allows for the deduction of medical expenses paid by a taxpayer for himself, spouse, and dependents to the extent that the expenses exceed 7.5% of the taxpayer's adjusted gross income. For you to include your parent's medical expenses on Schedule A of your tax return your parent must have been your dependent either at the time the medical services were provided or at the time you paid the expenses. (You can deduct the expenses in the year you pay them, even if your parent is now deceased). You can include any deductible medical expenses you paid for a parent who would have been your dependent even if the parent had income of $3,650 or more in 2010.
To deduct the medical expenses you pay for your parent you must provide more than half of his or her support for the year. However, you will be considered to have provided more than half of your parent's support if you and your siblings combined to provide that level of support and entered into a multiple support agreement. Amounts paid for qualified long-term care services are deductible as medical expenses This includes maintenance and personal care services that are required by a chronically ill individual, and provided pursuant to a plan of care prescribed by a licensed health care practitioner. "Maintenance or personal care services" is care which has as its primary purpose the providing of a chronically ill individual with needed assistance with his or her disabilities (including protection from threats to health and safety due to severe cognitive impairment). Don't forget to get the annual certification by a licensed health care practitioner if you (or your parent) intend to claim a medical expense deduction for qualified long-term care services. A "licensed health care practitioner" includes any physician and any registered professional nurse or licensed social worker.
Given the high cost of long term care, whether at home or in an institution, the tax savings from the medical expense deduction may substantially reduce or even eliminate a child's income tax liability. With planning, the deduction can be maximized. It is a shame that this tax break is so often overlooked. Getting Paid for Caregiving Services Most long-term care services are provided by family members. A parent may want to reward a caregiver child for otherwise uncompensated services. One way to achieve this is for the parent to make either a lifetime a testamentary gift to the caregiver child.
Compensating a child for services via "gift" can raise some interesting income tax issues which are beyond the scope of this article. In addition, the restrictions in Medicaid laws make it difficult to thank the child by using a gift because gifts can create an ineligibility period. As a result, families have begun to use employment-based compensation to pay a child for personal care services rendered to a parent. This can be accomplished through the use of a Family Caregiver contract which an agreement under which a child agrees to provide personal care services to the parent for reasonable compensation. Payment of funds under a proper personal care agreement avoids Medicaid's asset transfer restrictions because the elder is receiving fair market value--personal care services or the promise to be provided with care. Depending upon the amount of compensation there may be no uncompensated transfer and no period of ineligibility for Medicaid. On the downside, the benefit passed along to the child is reduced to the extent of the taxes that must be paid on the compensation.
Family care giving contracts raise numerous issues and need to be drafted with expert advice. As with gifts from the parent, issues related to competency and undue influence abound especially if the compensated child is not the sole heir of the parent. In terms of later eligibility for Medicaid, method of payment is a often disputed element of the care contract. The parties may choose lump sum, hourly fee-for-service, or some other form of payment. The lump sum offers the potential to retain assets within the family and is thus the most likely to be contested by the state Medicaid agency. A major problem with hourly "pay as you go" contracts is that the funds of the person in need of care may eventually be exhausted in paying for other supplemental services.
In addition, the retention of resources can delay eligibility for needed Medicaid services. A care contract is an employment contract. The employer and employee must comply with federal, state, and local laws, regulations, and ordinances regarding household employees. These include income, Social Security, Medicare, and unemployment taxes and workers' compensation. Withholding may be required for some of these. The employer parent and caregiver child should seek assistance from a qualified tax advisor to set up and maintain proper bookkeeping and to ensure that all required payments are made. These records will also help justify the expenditures and avoid transfer penalties. This article discusses three of the hidden financial breaks that may be available to the child who is caring for an aging parent.
To explore these and other possibilities, families should consult with an experienced elder law attorney. Certification programs for elder law attorneys are recognized in many states and offer a means of ensuring you that your lawyer is a specialist in elder care matters. Families can locate a certified elder law attorney through the website of the National Elder Law Foundation.
*Jeffrey A. Marshall is Certified as an Elder Law Attorney by the National Elder Law Foundation. This article is copyright 2010 by Jeffrey A. Marshall, who is managing attorney of Marshall, Parker & Associates. It may be duplicated and distributed provided no changes are made to its content and full attribution is given to Jeffrey A. Marshall. Short quotations from this article are also permitted with such attribution. This general information is not intended as and should not be relied upon as legal advice. Its dissemination does not create any attorney/client relationship. Its author is licensed to practice law in the Commonwealth of Pennsylvania. For specific advice about your particular situation, consult a lawyer who is licensed to practice in your jurisdiction. Pursuant to IRS regulations, any tax advice contained in this communication is not intended to be used and cannot be used for purposes of avoiding penalties imposed by the Internal Revenue Code or promoting, marketing, or recommending to another person any tax related matter.