With people living longer, many are caring for elderly relatives who can’t live independently. They often wonder about tax deductions for these care costs. These costs might be deductible as medical expenses. The deduction is claimed by the care recipient if they pay the expenses, or by someone else paying the costs, under “Medical Dependent” rules.

Incapable of Self-Care – A person is “incapable of self-care” if a physical or mental condition prevents them from meeting their hygiene or nutritional

needs, or if they need full-time care for safety. In assisted-living facilities, the entire cost of care, including meals and lodging, is tax-deductible as a medical expense if the resident is there primarily for medical care or cannot care for themselves. If the stay is mainly for personal reasons, only expenses directly related to medical care are deductible, not the cost of meals and lodging.

Assisted-Living Facilities – In assisted-living facilities, the total cost of care, including meals and lodging, can be tax-deductible if the resident is primarily there for medical care or unable to self-care. However, if the stay is mainly for personal reasons, only the expenses directly related to medical care are deductible, excluding the cost of meals and lodging.

Home Care – In-home care is an alternative to nursing homes, where caregivers offer services at home. The costs split into non-deductible household chores and deductible nursing services, which include tasks like medication administration, bathing, feeding, and dressing, typically done by nurses. However, if caregivers also do housekeeping, that part of their payment is not tax-deductible. Caregivers often face overwhelming emotional and financial burdens but must still adhere to tax and labor laws, which offer no special relief for these responsibilities.

Is the Caregiver an Employee?  Determining if an in-home caregiver is an employee is crucial due to labor laws. Caregivers can be hired through agencies or as household workers. Agency-provided caregivers are agency employees, so the family hiring them has no employment tax or payroll reporting duties, though these caregivers tend to cost more. Household workers are usually considered employees and are subject to Social Security and Medicare taxes. The employer must handle tax withholdings, payroll taxes, and annual federal payroll tax payments through their tax return. They’re also required to issue a W-2 and obtain federal and state employer ID numbers.

State rules for payroll taxes vary, with some having special provisions and others treating household employees like business employees. To simplify these tasks, employers often use payroll services specializing in household employment.

Employment taxes paid by the employer for deductible medical expenses can also be tax-deductible.

Household workers  – While some household employers may pay in cash without handling payroll taxes or issuing W-2s, this practice is illegal and risky, especially if a dispute or injury occurs. Contractors like gardeners or pool cleaners, who operate their own businesses, are not considered household employees. Key legal points for household employees include:

Overtime: Domestic employees must receive overtime pay for work beyond 40 hours per week, except for live-in employees in most states.

Hourly Pay or Salary: It’s illegal to treat nonexempt domestic workers as salaried employees.

Separate Payrolls: Business owners cannot include household employees in their company payrolls. Payments to household employees are personal expenses, not business deductions.

Eligibility to Work in the U.S.: Employers must verify that household employees are legally eligible to work in the U.S., including completing Form I-9.

Employee Retirement Benefits: A recent law allows employers of domestic workers to provide retirement benefits under a Simplified Employee Pension plan from 2023 onwards.

Medical Dependent: Taxpayers can claim medical expense deductions for someone who would be a dependent, but for their income level or joint return filing, under the “medical dependent” rule.

Post courtesy of Luba Milgram of Starlitetax.com in Westlake Village. Reach her at 805-719-2216 or email luba@starlitetax.com. As president and co-founder of Starlite Tax Solutions Inc. in Thousand Oaks, California, Luba Milgram specializes in tax planning for small business owners that provide a high return on investment. As a Certified Tax Planner, she offers concierge tax and accounting services to assist clients with anything from income shifting strategies to managing a family business.