Caregiver Taxes: Rules, Deductions, Credits

Dear Allegra:

My dad suffered a stroke last year and is still undergoing rehabilitation to return to an independent lifestyle. He has both a physical and an occupational therapist who come to his home a few times a week. To supplement his care, we have hired several independent caregivers.

Because we made all of these arrangements in a rush, we didn’t take time to explore the tax ramifications of these relationships. Now that tax time is here, we are trying to get a better understanding of our responsibilities for caregiver taxes.

Do you have to pay taxes on caregiver wages? If so, are caregiver expenses tax deductible? Is there a caregiver tax credit? It all seems so confusing to us.

Any resources you know of that might help us better understand caregiver tax rules for families would be greatly appreciated!

Sincerely,

Marilyn

Caregiver Tax Rules

Dear Marilyn:

This is definitely an area of tax law that families find confusing! Often the confusion results from not understanding how a caregiver is recognized by the Internal Revenue Service (IRS). Families don’t realize that by enlisting the support of an independent caregiver—one who is not employed by an agency—they may have hired an employee, and the family may be responsible for taxes depending on a variety of factors. However, if the caregiver is truly an independent contractor, then the caregiver may be responsible for taxes.

For tax purposes, the IRS looks at many things, including whether you dictate how the caregiver performs their work. An in-home caregiver who receives their instructions on what to do and how to care for the senior from you or another family member, could be considered a household employee. That would make you liable for all of the tax obligations that come from being an employer. These tax laws are constantly under review and scrutinized by different government agencies.

While I’m not in the business of giving tax advice, I do know of information and resources you might want to review before talking with a tax advisor this year. Here are a few I would suggest you read.

IRS Publication 926: This guide covers the ins and outs of paying taxes when you hire household employees. The caregivers you have hired may fall under this category. Reviewing this information will give you a better understanding of your obligations with regard to independent caregiver taxes, as well as Medicare, social security, federal, state, and local tax withholdings.

AARP Financial and Legal: This is great information for determining whether or not you can take any caregiver tax deductions for the expenses associated with hiring in-home caregivers. In some cases, adult children who pay for an aging parent’s care might be able to claim them as a dependent. The rules are very specific for family caregiver tax deductions so you might need a professional tax advisor to help you make this determination.

You may want to consider finding a home care company. For busy families, working with a home care company can be a great way to save time and limit some of the confusion with taxes. It also ensures that you have coverage for your father in the event an independent caregiver falls ill or has a family emergency of their own.

Good luck with your taxes, Marilyn!

Allegra