Caregiver Tax Benefits and Consequences: What You Need to Know As You Care for a Loved One

With the ever-increasing baby boomer population and more adults caring for aging parents, I am frequently asked about the tax benefits and consequences surrounding caregiving.  When one cares for a parent or relative, or hires someone to perform caregiving services for an aging loved one, there are an array tax issues to consider. While it can be confusing to navigate these issues on your own, meeting with your tax advisor can potentially save you a significant amount of money and, in many cases, reduce your tax liability.

First, we must define who is considered a caregiver.  

A caregiver can be identified as either someone you hire to provide care to another or you, yourself, when providing care for:

•          A spouse
•          A parent
•          A child of any age who is disabled, or
•          A disabled person other than a spouse or child
  
  Second, determine if the individual you hire is providing the care, or if they are an employee of an agency or other entity you hire. If you hire an individual directly, you need to understand employer/employee issues that may impact both the employer and the worker.
  
  If the individual meets the definition of an employee, know that the tax reporting can get tricky. To determine if the person you hire can be classified as an employee, they must be:
•          Someone you hired directly to perform household work, and,
•          Someone who is subject to your control as to  not only what work is to be done, but how it is to be done

According to the IRS, if the worker is classified as your employee, it does not matter whether the work is full time or part time or that you hired the worker through an agency or from a list provided by an agency or association. It also does not matter solely for the employee/contractor determination whether you pay the worker on an hourly, daily, or weekly basis, or by the job. The method of determining compensation may create an overtime pay issue, but that is a subject for another article.  Once the employee/contractor issues are sorted out, how you pay, what you withhold and the manner in which you report to government agencies require a clear understanding of the relevant tax law.

Finally, there are tax benefits to consider. The Child and Dependent Care Credit (typically, a percentage of the taxpayers federal care amount) allows for additional credits in certain states, Ohio being one of them.  While there is a state level credit in Ohio, it is very limited in scope.  Note the following from Tax.Ohio.gov :

Child and Dependent Care Credit (this credit will be calculated for you)

If your Ohio Adjusted Gross Income is less than $40,000 and if you made payments that qualified for the Federal Child and/or Dependent Care Credit, you are entitled to the Ohio Child and Dependent Care Credit.

If your Ohio I-File 1040 adjusted gross income is $40,000 or more, you're not entitled to this credit

The "Child and Dependent Care Credit" can be claimed by a person who pays for an outside caregiver (e.g. home health aide, adult day care services) to look after a qualifying individual so that they (the taxpayer) can work or look for work.

Related read: Accounting Today - Tax Breaks and Problems for Caregivers

A qualifying individual must generally be someone who either qualifies as a dependent for tax purposes, or would qualify as a dependent, subject to several limited exceptions in order to claim this credit, which can be found on line 48 of Form 1040. However, there are a few important factors to keep in mind.

• First, the taxpayer cannot claim this credit if the person they're paying to care for a qualifying individual is their own child who is under 19 years if age.
  
  
• Second, the Elderly Dependent Care Credit may not apply to money that is paid so an older adult can be cared for in a nursing home or assisted living facility.
  
  
• Third, it's important to remember that hiring an in-home caregiver who doesn't work for an outside agency can have certain tax consequences in the eyes of the IRS as was discussed earlier in this article. For more information on how hiring an independent caregiver can affect taxes, see "The Tax Implications of Hiring a Home Caregiver."