As people age, they may need full-time care. It could be on a short-term or long-term basis and it could be in-home rather than a nursing facility. In one case, the Tax Court overruled the IRS and allowed amounts paid to a decedent’s caregivers as a medical expense deduction.
|The 10 Percent Threshold
Certain expenses paid during the taxable year for the medical care of a taxpayer or dependent, which are not compensated by insurance or otherwise, may be allowed as a deduction to the extent that the expenses exceed 10 percent of the taxpayer’s adjusted gross income in 2016 (unchanged from 2015). In Lillian Baral’s case, she had adjusted gross income of $94,229 for the year in question (when the threshold was only 7.5 percent). Therefore, she could deduct the amount paid for medical care that exceeded $7,067 — or 7.5 percent of her adjusted gross income.
— The Tax Court
Facts of the case: Lillian Baral died at the age of 92. Her brother, David, handled her personal and financial affairs under a power of attorney during the last years of her life.
Baral’s primary care physician during a six-year period diagnosed her as suffering from dementia. Medical records showed she was not compliant taking her prescription medicines. Following one hospitalization, she was evaluated to determine if she was taking her medications and whether it was safe for her to live alone in her New York home. A medical summary indicated:
- Baral’s ability to communicate orally was impaired.
- She was confused.
- Assistance was required with activities of daily living.
- She required supervision due to her memory deficit.
- She was at risk of falling and, therefore, could not be left alone, and
- Baseline homecare services were required. The doctor determined Baral required assistance and supervision on a 24-hour basis for medical reasons and for her safety.
Her brother first engaged a company to provide the required assistance. The caregiver assisted Baral in bathing, dressing, making trips to the doctor, taking medications, and transferring to a wheelchair. After a couple of months, her brother hired the caregivers (and a substitute) directly. The caregivers also paid for some of Baral’s miscellaneous expenses and submitted receipts to her brother for reimbursement. The caregivers were paid $49,580 for their services and reimbursed $5,566 for expenses during the year at issue.
The Court noted the caregivers were not licensed healthcare providers, and the payments to them were not for the diagnosis, cure, mitigation, treatment, or prevention of Baral’s disease. However, the amounts paid to the caregivers were deductible if their services were qualified long-term care services.
“Qualified long-term care services” means necessary diagnostic, preventative, therapeutic, curing, treating, mitigating, and rehabilitative services and maintenance or personal care services required by a chronically ill individual and provided pursuant to a plan of care prescribed by a licensed health care practitioner. A “chronically ill individual” means an individual who has been certified by a licensed health care practitioner as:
- Being unable to perform at least two of six specified activities of daily living (eating, toileting, transferring, bathing, dressing, and continence) for a period of at least 90 days due to a loss of functional capacity;
- Having a level of disability similar to the level of disability as determined under IRS regulations; or
- Requiring substantial supervision to protect the individual from threats to health and safety due to severe cognitive impairment.
A licensed health care practitioner is a professional including a physician, registered professional nurse and licensed social worker. An evaluation of Baral showed that she required assistance with activities of daily living but did not specify which activities of daily living. Thus, while the doctor hadn’t certified that Baral met the activities-of-daily-living level of disability, he diagnosed her as suffering from severe dementia. In other words, she was cognitively impaired. Her cognitive impairment prevented her from properly taking her prescription medicine. Failure to take prescribed medication posed a risk to her health.
Baral’s doctor certified she required substantial supervision to protect her from threats to her health and safety due to her severe cognitive impairment. Therefore, she met the third test above.
“Maintenance or personal care services” means any care that has the primary purpose of providing needed assistance with any of the disabilities that result in the individual’s qualifying as a chronically ill individual, including protection from threats to health and safety due to severe cognitive impairment. As explained, an evaluation showed that Baral required supervision and a doctor determined she required 24-hour-a-day supervision to protect her from threats to her safety and health. The Court concluded the services were qualified long-term care services as defined in the tax code.
The Court held the $49,580 paid to the caregivers for services qualified as long-term care services and deductible as medical care. The Court did not allow a deduction for the $5,566 paid to the caregivers for out-of-pocket expenses because they were not adequately documented.(Estate of Lillian Baral et al., 137 T.C. No. 1)
Tips for Successful Deductions
The good news is that the taxpayer secured a deduction for the full cost of the services of the caregivers. But not all taxpayers are so lucky. Keep the following in mind.
Consider the size of deduction. In this case, the deduction was just under $50,000 for one year’s care. You could be looking at several years of care for higher annual amounts. That means the deduction is likely to be worth a considerable amount. It also means there’s a good chance the IRS will question it. Be prepared.
Get a doctor or other qualified health care professional’s written evaluation.The doctor may not be available at audit, so a second opinion might be a good idea. Make sure the evaluation meets the requirements in the tax law.
Keep good records and file the proper tax form. Pay by check, made out to the caregiver. If you have to pay cash, get a receipt. For out-of-pocket expenses, keep the receipts. Provide the caregiver with a W-2 if an employee or a 1099 if an independent contractor.
Keep a diary. It helps to substantiate expenses. Have the caregivers do the same.
Know the difference between medical versus household help. You can only deduct amounts paid to a caregiver for nursing-type services, not for household cleaning. Unless you separately pay a maid, it may be difficult to convince the IRSall payments were for care. An allocation has been allowed in some cases.
Be aware of the employment tax implications. If you employ a caregiver directly, you’re probably liable for employment taxes.
Consult with your tax adviser. The dollars involved are probably large enough to make sure you’re complying with all the requirements.