Posts Tagged ‘caretaker’

Helping Care for Your Relative Provides Income Tax Benefits

APRIL 9, 2012 VOLUME 19 NUMBER 14
Federal and Arizona state income tax returns are due next week. It’s a good time to review tax deductions for one of the common situations we deal with: in-home (or, for that matter, institutional) caregiving for an infirm family member.

We wrote about an individual case involving long-term care deductions last fall. In that case no returns had been filed, so the taxpayer was playing catch-up — but the U.S. Tax Court agreed that she could deduct the expenses of in-home caregivers. The Court articulated a three-item test to determine whether the taxpayer was a “chronically ill” individual; once she had met any one test, the taxpayer could deduct her medical expenses, including the caregivers.

But what if the caretaking expenses had been paid by someone other than the taxpayer herself? If, for example, she had lived with her adult daughter and the daughter had paid for caretakers to come to the home?

In such a case the daughter should be able to deduct the expenses of care — provided that the patient is a “dependent.” That requires the taxpayer using the deduction to have provided more than half of the patient’s support, and is only available if the patient is a relative OR lived with the taxpayer.

The details about deducting medical expenses for a relative or someone who lives with you are spelled out in IRS Publication 502. Don’t fret about the official-sounding title — it’s actually straightforward and understandable. It also explains exactly what the IRS is looking for when you deduct your own OR a dependent’s medical expenses, and what documentation you will need to provide (or maintain in case you are challenged).

Of course the medical deductions only affect your federal income tax to the extent that they total more than 7.5% of your Adjusted Gross Income (AGI). For many people that limitation is hard to meet. Anyone paying for in-home caregivers, though, is likely to have gotten near to or exceeded the 7.5% threshold.

What about listing a relative (other than your minor children) as a dependent on your own tax returns? Is it possible that the daughter in our earlier scenario might be able to list her mother as a depedent if the mother lives in her home? For that matter, can she list her mother as a dependent if she lives in a nursing home or assisted living facility, but the daughter pays the bill?

The short answer in both cases is “yes.” A parent can be a dependent. That can mean, as described above, that their medical expenses may be listed as deductions on your return — but it also leads to a more direct benefit. If you can list your parent (or another relative) as a dependent, you can get an additional exemption — which reduces your taxable income even before looking for eligible deductions like medical expenses.

Can your parent be your dependent? Yes, but the requirements can be a little complicated. First, they must EITHER be a “qualifying relative” (pretty much any kind of relative you can name, including stepchildren and foster children) OR live with you. In addition, they may not have more than $3,700 (in 2011) of their own income. You must also provide at least half of their support. There are limited exceptions to some of those rules, but that’s the basic test for determining whether you can claim a parent or another person as a dependent. NOTE: these rules are not the same as the ones determining whether you can claim your minor children as dependents — THOSE rules can be much more detailed and complicated.

How can you figure out if you meet all the tests (and their exceptions)? You may not be surprised to learn that the IRS has a Publication to explain that. It is IRS Publication 501, and (just like the earlier Publication we mentioned) it is actually helpful and understandable information.

Can you get a direct credit for the caretaking services you provided for your mother yourself last year? Generally, no — and if you think about it that shouldn’t be too surprising. If you could deduct the value of those services, you would need to claim a similar amount as “income.” But that doesn’t mean that there is no tax benefit to having provided those services. First, they will help you establish that you have provided more than half the support necessary for your parent or family member. Second, you might be eligible to deduct expenses (but not the value of your caregiving) for a dependent. Look at IRS Form 2441 for Child and Dependent Care Expenses; the separate instructions for Form 2441 are (wait for it) straightforward and understandable.

Summing up: taking care of a relative (or someone who lives with you, even if they are not a relative) may be personally and emotionally rewarding. It will not usually be profitable. At least, though, there are some slight tax benefits for those who undertake what is usually a labor of love. Make sure you claim deductions and exemptions you are entitled to by virtue of your caregiving services.

In-Home Caretaker Wages Deductible Based on Doctor’s Letter

SEPTEMBER 5, 2011 VOLUME 18 NUMBER 31
Queens (New York) resident Lillian Baral was in her early 90s. She lived at home, but she required full-time assistance with her care. In 2007 she paid two caretakers a total of $49,580 for live-in care (one lived with her for five weeks while the primary caretaker took a vacation). Were the payments deductible on her income tax return?

The short answer, according to the U.S. Tax Court: yes. Not surprisingly, the more complete answer is complicated and depends on the specific facts of Ms. Baral’s case.

Ms. Baral had been diagnosed as suffering from dementia as early as 2004, three years before her long-term care costs became a tax issue. In December, 2006, her physician wrote an evaluation of her then-current mental status. He found her to be confused, unable to communicate clearly and at risk of falling in her home. Because of her memory deficits she would require assistance with the activities of daily living, he wrote. She needed full-time assistance and supervision for medical and safety reasons if she was going to stay at home.

Ms. Baral’s financial affairs were being handled by her brother David, relying on a power of attorney she had signed some time before. He paid all her bills, handled her checking and other accounts, and hired the nursing service to care for her in her home. By the end of 2006, in an effort to save money, he had discharged the nursing service and hired one of their caretakers directly to live with his sister and oversee her care.

Mr. Baral did not, however, remember to file his sister’s income tax returns for 2007. The Internal Revenue Service noticed, and near the end of 2009 they filed a “substitute for return” based on records available to the IRS. The form indicated that her income for 2007 had been $94,229; after including a personal exemption and a standard deduction, the IRS calculated that Ms. Baral owed $17,681 plus interest and penalties.

By the time the IRS sent out its notice, Ms. Baral had died. Her brother had been appointed as personal representative of her estate; he argued that (a) she had not been required to file a tax return at all, and (b) she was entitled to a medical expense deduction for the long-term care costs she had incurred. The IRS disagreed on both scores.

The dispute ultimately found its way to the United States Tax Court, which hears claims and defenses regarding income tax returns (along with other tax-related proceedings). The Tax Court ruled that the key legal question was whether Ms. Baral was a “chronically ill individual.” If she was, then her caretakers’ salaries would be “qualified long-term care services” and therefore deductible. The court noted that there are three ways to identify a “chronically ill individual”:

  1. Was Ms. Baral unable to perform at least two of the six “activities of daily living”? The six ADLs are: eating, toileting, transferring, bathing, dressing, and continence. Although her physician had said that she required assistance with her ADLs, he had not identified which ones — and therefore the court could not determine whether she was deficient as to only one, or as to two or more. She did not meet this standard.
  2. Did Ms. Baral have a level of disability “similar to” the ADL standard? Again, the court found that the physician’s evaluation was not clear.
  3. Did Ms. Baral require substantial supervision to protect her from threats to her health and safety because of “severe cognitive impairment”? Applying this test to Ms. Baral’s condition and circumstances was a little easier for the court. Because her physician had described her as demented, and at risk for falls or failure to take prescribed medication, Ms. Baral met this test.

Fortunately for Ms. Baral’s tax situation, only one of the three standards had to be met. Because of the evaluation by her primary care physician in 2006, the cost of her live-in caretakers would be a legitimate deduction on her income taxes — or at least it would be deductible to the extent that it exceeded 7% of her adjusted gross income.

Ms. Baral’s brother had also argued that he should be able to deduct the $760 paid in 2007 to her physicians (the Tax Court agreed) and the $5,566 she paid to caretakers for reimbursement of expenses they incurred on her behalf. The Tax Court denied the deduction for reimbursement, since there was no evidence that the payments were for medical items. If Mr. Baral had been able to show that they were, for example, co-payments on prescription medications, or over-the-counter medications at the direction of her physician, or medical supplies, they would have also been deductible. Estate of Baral v. Commissioner, July 5, 2011.

What does Ms. Baral’s case tell us about tax issues surrounding home care? Several things:

  • Keep good receipts. To the extent possible, segregate clearly deductible expenses from questionable or non-deductible expenses, and make sure the purchases are identifiable.
  • Get a good doctor’s letter. Ask the attending physician for a letter that specifically addresses ADLs, the need for caretakers to protect the patient’s safety AND a general description of limitations on the patient’s abilities.
  • If you are in charge of the patient’s finances, file their income tax returns. Someone with $95,000 of income — even if much of it is Social Security and pension income — is almost certainly going to need to file a return. Mr. Baral would have had a much easier time if he had filed the return claiming the deductions, rather than having to argue about the IRS’s “substitute for return” after the fact. Note that the IRS action was delayed, too — it can be that much harder to prove the taxpayer’s condition two (or three, or four) years after the fact, and it is not uncommon to be addressing these issues after the taxpayer’s death.

Estate Plan For Benefit Of “Confidential” Wife Upheld

OCTOBER 5 , 2009  VOLUME 16, NUMBER 56

Legal issues confronted by celebrities are, of course, often fodder for tabloids, late-night television and casual gossip. They also often reveal unusual legal problems, since celebrities tend to lead lives that are more complex than those of their fans. Comedian Richard Pryor’s death in 2005 is a case in point. His estate involved at least three interesting legal issues, as described in a recent California Court of Appeals decision.

Mr. Pryor was married to Jennifer Lee Pryor in 1981; they divorced in 1982. Shortly after that, Mr. Pryor was diagnosed as suffering from multiple sclerosis. Almost twenty years (and, for Mr. Pryor, two intervening marriages, both to the same woman) later, the couple remarried—after Jennifer Pryor had been providing care to Mr. Pryor for a seven-year period.

The second marriage between Richard and Jennifer Pryor raises the first interesting legal issue. The marriage was by a “confidential marriage license,” an unusual alternative available in California. This type of marriage somewhat resembles the old common-law marriage concept, except that it involves a formal marriage certificate. The couple must swear that they live together as a married couple, but the certificate, once issued, can not be retrieved from public records except by the husband, wife or court order. Mr. Pryor apparently did not tell his family that he and Mrs. Pryor had remarried.

When Mr. Pryor died in 2005, his daughter Elizabeth Pryor still did not know that he had been legally married. Mr. Pryor’s estate plan left a significant share of his assets to Mrs. Pryor, and daughter Elizabeth filed an action to set aside those gifts.

Elizabeth Pryor’s lawsuit relied on another unusual California statute, which automatically invalidates gifts given to care custodians unless certain additional steps are taken. In other states there may sometimes be a presumption of invalidity when gifts are made to caretakers, but California’s statute is much more stringent. There is, however, an exception for gifts made to a spouse, and Mrs. Pryor produced the marriage certificate to show that the exception applied in her case.

Elizabeth Pryor then sought to annul the confidential marriage. She argued that Mrs. Pryor had acted fraudulently in securing the marriage, and that she should be able to seek the annulment as her father’s “successor in interest.”

The trial judge dismissed her annulment petition and ruled against her on the merits in the action to set aside the transfers. The California Court of Appeals upheld both judgments, ruling in two companion appeals that (1) an annulment proceeding can only be brought by a spouse, and can not be pursued after one spouse’s death, and (2) consequently, Elizabeth Pryor’s claims against Jennifer Pryor involving transfers to a caregiver must fail. Pryor v. Pryor and Estate of Pryor v. Pryor, September 29, 2009.

For those of us who grew up laughing at Mr. Pryor’s regular television comedy appearances, and who enjoyed Silver Streak and Stir Crazy, his decline and death were especially tragic. Irony, one of the core components of good comedy, abounded in his life and death. Two good Richard Pyror lines seem particularly apt:

“I believe in the institution of marriage, and I intend to keep trying until I get it right.” (Mr. Pryor was married seven times, though only to five different women.)

“Marriage is really tough because you have to deal with feelings … and lawyers.”

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