Eldercare Can Be a Medical Deduction

With people living longer, many 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 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. However, 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. Most states have special provisions for reporting and paying state payroll taxes on an annual basis that are similar to the Federal reporting requirements.

If you need assistance in setting up a household payroll, please contact this office for additional details and filing requirements.

Impairment-Related Medical Expenses

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.

Nursing Services

Nursing Services Wages and other amounts paid for nursing services can be included in medical expenses. Services need not be performed by a nurse as long as the services are of a kind generally performed by a nurse. This includes services connected with caring for the patient's condition, such as giving medication or changing dressings, as well as bathing and grooming the patient. These services can be provided in the home or another care facility.

Generally, only the amount spent for nursing services is a medical expense. If the attendant also provides personal and household services, these amounts must be divided between the time spent performing household and personal services and the time spent for nursing services. However, certain maintenance or personal care services provided for qualified long-term care can be included in medical expenses.

Additionally, certain expenses for household services or for the care of a qualifying individual incurred to allow the taxpayer to work may qualify for the child and dependent care credit. Part of the amounts paid for that attendant's meals are also included in medical expenses. Divide the food expense among the household members to find the cost of the attendant's food. If additional amounts for household upkeep were paid because of the attendant, include the extra amounts with the medical expenses. This includes extra rent or utilities paid because a larger apartment was needed to provide space for the attendant.

Medical Dependents

Medical expenses paid for dependents may be deducted. To claim these expenses, the person must have been a dependent either at the time the medical services were provided or at the time the expenses were paid. The qualifications for a medical dependent are less stringent than those for a regular dependent. A person generally qualifies as a dependent for purposes of the medical expense deduction if:

1. That person lived with the taxpayer for the entire year as a member of the household or is related
2. That person was a U.S. citizen or resident, or a resident of Canada or Mexico for some part of the calendar year in which the tax year began, and
3. The taxpayer provided over half of that person's total support for the calendar year. Medical expenses of any person who is a dependent may be included, even if an exemption for him or her cannot be claimed on the return.

Medical Expenses Under A Multiple Support Agreement - Under the provisions of a multiple support agreement, only the one who is considered to have provided more than half of a person's support under such an agreement can deduct medical expenses paid, but the medical directly paid by that individual. Any medical expenses paid by others who joined in the agreement cannot be included as medical expenses by anyone.

Support Claimed Under a Multiple Support Agreement

A multiple support agreement is used when two or more people provide more than half of a person's support, but no one alone provides more than half. Whoever is considered to have provided more than half of a person's support under such an agreement can deduct medical expenses paid.

Any medical expenses paid by others who joined in the agreement cannot be included as medical expenses by anyone.

Long-Term Care

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 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.

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 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 after '96 (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 exclusion is limited to $175 a day, indexed for medical cost inflation (amount was $210 in 2002) 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.

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).

Care for the Elderly

When the elderly reach the point that they can no longer care for themselves, there are generally two courses of action available to the caregiver; (1) Provide for in-home care, or (2) place the individual in a care facility. Each has its own distinct tax ramifications:

In-home Care - If the elderly person has the option to remain in their home and provide in-home care, that care is deductible as a medical deduction, provided the expenses are directly related to the individual's medical care. If the individual or individuals providing that care also provide household services, the cost must be allocated between deductible medical expenses and nondeductible personal expenses. The individual or individuals providing the care need not be a nurse, granted they are providing services normally administered by a nurse. In-home care is also subject to the rules for household employees that require the employer (the elderly individual) to withhold FICA and Medicare taxes and issue a W-2 at the end of the year. There are generally state filing requirements as well, so please call this office for assistance in setting a household payroll.

Care Facility - If the option is to place the elderly individual in a care facility such as a convalescent hospital, nursing home or a home for the elderly, then the cost of that care is deductible, provided the primary reason for being there is to receive medical care. If medical care is the primary reason, then the deduction will include the cost of meals and lodging and no adjustment is needed.

Medicaid And Eldercare

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. A Directory of State sites allows you to review the rules for any particular state.

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: They intend to return home; or The residence is used by a spouse and/or dependent relatives; or 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 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 $1,976 a month of the couple's income and up to $79,020 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 $81,020 ($79,020 + $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.

FINANCING NURSING HOME CARE - Generally, a nursing facility's administration will help determine if the patient is eligible for Medi-Cal to pay the costs of the nursing home. If not, they can explain under what conditions the patient may become eligible in the future. The law requires that nursing home residents receive identical treatment regarding transfer, discharge, and provision of services regardless of the source of payment. A Medi-Cal resident can stay in any bed in a nursing facility.

Spousal Impoverishment Provision - Couples looking at nursing home placement for a spouse need to be aware of the special laws enacted that allow the spouse remaining at home to keep a certain amount of income and resources when the other spouse enters a nursing home. This is intended to prevent impoverishment of the spouse at home.

Community spouse's monthly maintenance needs allowance: The spouse at home may keep all of the couple's income up to $2,019 per month (this is the base 1998 amount which is adjusted annually for inflation). This is called the community spouse's "monthly maintenance needs allowance". Note: This amount is adjusted annually by a cost of living increase. The spouse at home may obtain additional income or resources through a "fair hearing", or by court order. If the spouse at home receives income above the limit in his/her name only, he/she can keep it all (this is called the "name on the instrument rule"); however, he/she will not be allowed to keep any of the nursing facility spouse's income. Income received by the nursing facility spouse will go to his/her share of cost. The spouse in the nursing home is allowed to keep $35 monthly for personal needs ("personal needs allowance").

Resources: The spouse at home can keep up to $80,760 (this is the base 1998 amount which is adjusted annually for inflation) in resources, and the institutionalized spouse may keep up to $2,000. (Different laws apply to spouses who entered a nursing facility before September 30, 1989. If this is the case, the individual should contact a lawyer/advocate knowledgeable about this area of the law.) Both separate property (i.e., from a previous marriage or inheritance) and community property that is not exempt are combined and counted at the time of application for Medi-Cal. Once the resource limit has been reached, all ownership interest should be transferred to the spouse at home. The institutionalized spouse's $2,000 resource limit should be kept separately and accounted for separately.

TRANSFER OF ASSETS - Institutionalized Medi-Cal recipients or applicants who transfer non-exempt assets for less than fair market value during a 36-month "look back" period may be subject to a period of ineligibility. The length of the ineligibility period depends on the value of the transferred asset or resource and date of transfer period. The period of ineligibility begins on the date the transfer was made. The 36-month "look back" period begins when an institutionalized person applies for Medi-Cal or when a Medi-Cal recipient is admitted to a nursing facility. A 60-month "look back" period for assets from certain trusts is also required. Federal law amended trust regulations makes it more difficult to set up a Medicaid qualifying trust for eligibility and estate claims purposes. For a trust already established, it is recommended that an attorney review it.