Taxes '08

Writing off caregiver expenses

by Bill Norman on January 1, 2009 - 2:49pm

QUEST Vol. 16, No. 1

For people who find themselves spending significant sums for the services of caregivers/personal care assistants (PCAs), the good news is that some of those expenses may be recouped.

The three primary areas to check out in this regard are child and dependent care expenses; unreimbursed business/employment expenses related to disability; and medical and dental expenses.

Medical and dental expenses

Some wages paid to caregivers/PCAs may be deducted as a medical expense as long as the person paying the wages isn’t being reimbursed for them from some other source, such as an insurance policy or government assistance program.

The biggest hitch to claiming these costs as a medical deduction is passing the 7.5 percent hurdle. Before they can be deducted, medical expenses must exceed 7.5 percent of adjusted gross income (AGI, the amount usually entered at the bottom front of IRS Form 1040).

For example: If a person reported an AGI of $25,000, he or she could deduct only medical and dental expenses greater than $1,875 (7.5 percent of $25,000) from reportable income.

‘Nursing’ is flexible

In describing the types of PCA services that may be deductible, Internal Revenue Service Publication 502 says: “You can include wages and other amounts you pay for nursing services. 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 performed in your home or another care facility.”

Any Social Security and state employment taxes the taxpayer pays for a hired caregiver also can be lumped in with medical/dental expenses.

A better deal … sometimes

Uncle Sam offers a better deal (in many cases) to employed people with a physical disability that “substantially limits one or more of your major life activities, such as performing manual tasks, walking, speaking, breathing, learning and working.”

For people who are working for themselves or others and who fall into that impairment category, the IRS will permit deductions of all unreimbursed, allowable business expenses specifically related to their disability.

The sweetheart aspect

The best part of these impairment-related work expenses is that — unlike medical/dental deductions that must exceed 7.5 percent of AGI — these are allowable at 100 percent of their original cost. That is, they are a dollar-for-dollar reduction in the taxpayer’s final tax, whereas medical/dental deductions chip away at the taxpayer’s reportable income (on which the final tax is based).

The critical requirement for deducting caregiver/PCA wages as a work expense is that the work they perform must be directly connected to helping you perform your own work. For example, if a caregiver must be present at your place of employment to assist you with toileting during your work hours, you can deduct the wages you paid for that service.

A representative of the Taxpayer Advocate Service (an independent agency within the IRS) was quick to emphasize the “directly connected” work requirement: “It’s not deductible as a work-related expense if you have a caregiver who would as a matter of course every day get you out of bed, bathe, groom and feed you. Those are personal activities the caregiver would perform whether you were working or not. To be deductible, the caregiver would have to be helping you somehow do your job. That could include driving you to work; assisting you with toileting or feeding while on the job; or otherwise directly helping you do your own job satisfactorily.”

IRS Publication 502 devotes a section titled “Impairment-Related Work Expense” to this specific type of deduction.

Child and dependent care expenses

Taxpayers may claim this tax credit if:

•  they pay someone to care for their dependent (who is less than 13 years old); or
•  they pay someone to care for their spouse or dependent over age 13 who is unable to care for himself/herself.

(Note that tax credits are subtracted from the taxes you owe the IRS, while deductions are subtracted from your reportable income.)

Two restrictions

To claim the credit, the taxpayer must have hired the caregiver/PCA so the taxpayer could work or look for work. If the taxpayer goes through the entire year diligently looking for work and doesn’t find work, or at least doesn’t have any income, then he or she can’t claim the child/dependent care credit.

The more money a person makes, the smaller the credit they can claim, up to a certain point. Those who make zero to $15,000 a year (adjusted gross income) can claim 35 percent of caregiver expenses. Between $15,000 and $43,000, the percentage of expenses that can be claimed steadily shrinks to 20 percent, where it remains.

No matter the income level, there’s a final cut-off in the amount of the credit. For a tax filer with one qualifying child or dependent adult, the maximum credit is $3,000 per year. For two or more qualifying children/dependents, the limit is $6,000.

IRS Publication 503 addresses this area further.

Variation on that theme

William Perez, a former IRS employee and now a certified public accountant (CPA) in San Francisco, hosts the tax advice section on the Web site. Perez says that a disabled person with large medical bills, but not large enough to itemize deductions, might want to have himself/herself claimed as a dependent by someone else.

Of such a dependent, Perez goes on to say, “He would lose his right to claim himself as a personal exemption … and also the ability to claim his own deductions [but] the goal is to lower … combined tax liability so that the household as a whole faces less taxes.” That is, by combining the disabled dependent’s allowable expenses with those of the taxpayer in order to exceed the 7.5 percent threshold, the overall tax bill may be lowered.

He cautions that an arrangement of this sort would require that the dependent live at home (or with the taxpayer who is claiming him/her) a minimum portion of the year and make no more than a certain level of income.

IRS Publication 502 spells out who can be claimed as dependents in the section “Whose Medical Expenses Can You Include?”

Mix and match, carefully

Caregiver expenses cannot be “double dipped” and claimed under multiple categories, such as both medical expenses and child/dependent care expenses. That being said, if a person claiming the child/dependent care credit pays more for caregiver assistance than the cut-off limit ($3,000 for one child or adult dependent), any overage may be applied to medical and dental expenses, potentially boosting these expenses above the 7.5 percent threshold.

Record keeping is imperative

As with all tax-related matters, filers should ensure they keep legible records of every expense they claim as a caregiver/PCA expense. Keep copies of paychecks or paystubs. If meals are provided to a caregiver in a work-related setting, maintain records of restaurant tabs (including tips) or the cost of groceries.

Tax deductions and credits for caregivers are by no means the simplest subjects the IRS lays out, but the information is out there for the diligent digger.

Note: When Quest addressed the issue of impairment-related work expenses in an article five years ago (“Take It Off,” Quest March-April 2004), tax guidelines were vague regarding the deductibility of mileage for commuting to work in an accessible vehicle. Now, the IRS has cleared up this gray area — mileage for driving an accessible or adapted vehicle to work does not qualify as an impairment-related work expense. For tax assistance, consult a disability-knowledgeable attorney or CPA, and check out the resources in InfoQuest.

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