Illinois Estate Planning & Elder Law Blog

Long-tern care can be very expensive, but many long-term care expenses can be deducted from your taxes.

In a recent decision by the U.S. Tax Court, it ruled that payments to non-medical caregivers are still deductible as medical expenses. In Estate of Lillian Baral (U.S. Tax Ct., No. 3618-10, July 5, 2011), Lillian Baral suffered from dementia, and her doctor recommended that she get 24 hour care. Her brother hired caregivers to assist Ms. Baral with daily activities. On her tax return, Ms. Baral included a deduction for medical expenses for the payments of the caregivers. The IRS said the expenses were not deductible and asked for more money. Following Ms. Baral’s death, her estate appealed the matter to the U.S. Tax Court.

Under tax law, expenses for medical care may be claimed as an itemized deduction if they exceed 7.5 percent of adjusted gross income. (Note that this threshold will rise to 10 percent of adjusted gross income in 2012.) The definition of medical expenses includes the cost of long-term care if a doctor has determined you are chronically ill. Chronically ill means you need help with activities list eating, going to the bathroom, bathing and dressing, or you require substantial supervision due to a severe cognitive impairment.

The Tax Court agreed with Ms. Baral that the payments to the caregivers for assisting and supervising Ms. Baral are deductible medical expenses. The expenses qualified as long-term care services even though the caregivers were not medical personnel because a doctor had found that the services provided to Ms. Baral were necessary due to her dementia.

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Most seniors prefer to stay at home as long as possible before moving into a nursing home. For many families, this means eventually hiring a caregiver to look after an aging relative. Caregivers can be hired directly or through a home health agency.

When a caregiver is hired directly, you need to consider all of the tax and liability issues. As an employer, you are responsible for filing payroll taxes, tax forms and verifying that the employee can legally work in the United States. If you pay $1700 or more in wages in 2011 to any one employee, you need to withhold and pay Social Security and Medicare taxes. If you pay more than $100 in wages in 2011, you need to pay unemployment taxes. Insurance for an accident which occurs on the job should also be addressed.

The benefit of hiring a caregiver directly is that you have more control over who you hire and can choose someone who you feel is right for your family. In addition, hiring privately is usually cheaper than hiring through a home health agency.

When you hire through a home health agency, the agency is the employer, so you do not need to address the tax and liability issues. The agency takes care of screening the employees, doing background checks and providing insurance. A licensed home care agency must provide ongoing supervision to its employees. It can help the employees deal with difficult family situations or changing needs. The agency may also be able to provide back-up if a regular caregiver is not available.

The downside of going through an agency is not having as much input into the selection of a caregiver. Caregivers may change or alternate, causing a disruption in care and confusion.

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