When a senior reaches a point that they need regular care, families often prefer to choose someone they know to provide that care — especially if there’s a family member who can do it. In some cases, this family caregiver replaces moving to an assisted living community, and in order to make it financially feasible for that individual, wages are provided.
According to the IRS, family caregivers, nannies, and some other household workers are a special class of workers with specific tax regulations. In general, payments to caregivers may help reduce estate tax liability, but experts caution that it is essential to report transactions properly.
Learn more from Senior Planning Services, a tri-state area Medicaid planning company that assists seniors and their caregivers, about what caregivers need to know about gift and estate tax.
Gift and Estate Tax FAQs for Family Caregivers
How to Process Payments Through Payroll
Instead of simply handing over cash each week, many experts recommend hiring a payroll service to write the checks, withhold employee taxes, and file employer taxes. It’s also important to draft a formal employment agreement just as you would if you were hiring someone outside the family.
These agreements are particularly critical if the patient ever needs to apply for Medicaid to help cover long-term care: Medicaid will look back several years to see how money was spent, and large chunks that are seen as “gifts” can count against the senior’s ability to receive help from Medicaid.
How to Process Payments as Gifts
You might assume that you don’t need a formal agreement to look after your parent or other senior loved one. After all, you know that they’ll keep paying you, and you might think that simply handing the money over as a gift keeps it “under the table” and causes less trouble for everyone. Often, however, this isn’t the case. If the amount of the gift exceeds $14,000 per calendar year, that gift will have to be reported as income and taxed accordingly.
Choosing a different method of payment doesn’t excuse the tax, either. Excusing a debt, offering a piece of property or vehicle, or even selling a piece of property at far less than the appraised value of the property all count as gifts and will need to be reported and taxes paid accordingly. Typically, it’s either the donor or their estate that pays the taxes, but if they don’t cover them, the recipient is still responsible for the amount of the tax. Gifts can also have a negative impact on Medicaid eligibility: they can’t be counted as part of the “spend down” necessary to reach Medicaid asset limits, and excessive gifts reported over the course of the five years prior to applying for Medicaid can prevent them from qualifying.
Estate Taxes and Probate
When your elderly loved one passes away, it will take time to distribute their assets to their beneficiaries. In several states, there’s an estate tax that requires a percentage of the estate to be paid to the government before payments are made to your loved one’s beneficiaries. Other states have inheritance taxes that will have to be paid once the estate is wrapped up. The federal government also takes its cut: up to 40% of large estates, though only a small percentage of estates actually qualify for federal inheritance taxes.
The process of distributing this money is called probate, from filling out a will to dividing the assets. Non-probate assets don’t have to go through the court and can be given straight to the people to whom they now belong: joint property and accounts, accounts “payable on death,” etc.
Claiming Your Parent as a Dependent
In some cases, your parent may not be paying you to care for them. In fact, it might be necessary for you to pay to take care of them, particularly if their retirement funds run out before their death. If you pay for more than 50% of your elderly loved one’s care, they can qualify as a dependent when you file your taxes at the end of the year. You don’t have to live under the same roof for that to be true, either: if you’re paying for an apartment or for nursing home care, your loved one can still qualify as an adult dependent. This permits you the same tax exemption as adding another child. You can also, under some conditions, deduct medical expenses that you’ve paid for your parents.
Many people don’t take the time to look at the big picture when it comes to financial planning for old age. They’re caught off-guard and unaware when the time comes to prepare for a given stage. If you wait until you’re in that stage, you might be inadequately prepared for the expenses that hit. On the other hand, prior preparation will go a long way toward helping you understand what you or your loved ones will need when the need for more extensive care arrives.
About the Author
Benny Lamm is a communication specialist and blogger at Senior Planning Services, an industry leader in helping seniors and their families achieve Medicaid-sponsored long-term care. He enjoys playing the guitar, spending time with family and social networking.
Do you have questions about what to do if you’re unable to care for your senior loved one at home? Our Senior Living Advisors can give you options, and their help is always free. Learn more for our resources for caregivers.