Payments To Caregivers: Tax Court Rules Payments Deductible

Certified as an elder law attorney by the National Elder Law Foundation under authorization of the Pennsylvania Supreme Court

Certified as an elder law attorney by the National Elder Law Foundation under authorization of the Pennsylvania Supreme Court

A recent decision of the United States Tax Court reminds us that the some of the cost of caregiving for the chronically ill may be tax deductible, but that it is important to get the proper documentation.

It may also help if you file a tax return.

Lillian Baral suffered severe dementia and required assistance and supervision 24 hours a day, her doctor determined. Her brother arranged for caregivers to help her bathe, dress, travel to the doctor, take medications, and transfer to a wheelchair.

Although she had $94,229 in adjusted gross income for 2007, she did not file a tax return, nor did anyone file one for her. The IRS filed a substitute return for her, based on information from third parties, resulting in a tax bill of $17,681.

On her behalf, Lillian’s brother questioned the amount of the tax bill and claimed she could deduct her costs for caregiving, physicians, and supplies. In 2007, she incurred $49,580 for caregiver services, $760 for physicians’ services, and $5,566 for supplies obtained by her caregivers.

IRS rules allow a tax deduction for the medical care of a taxpayer, including “qualified long-term care services” for “a chronically ill individual.” Those services can include “maintenance or personal care services.” A deduction is allowed for the amount of such costs that exceed 7.5% of the taxpayer’s adjusted gross income.

But in this case, the IRS said Lillian had not met the requirements of showing a severe enough impairment, that the services were provided “pursuant to a plan established by a qualified health care professional,” or that the supplies were related to her care.

The Tax Court found that Lillian met the requirements to deduct her caregiver services because her doctor had certified her as being cognitively impaired and “requiring substantial supervision to protect her from threats to her health and safety.” The court also allowed deduction of her physician costs.

However, the court disallowed the deduction for supplies because no one gave the court receipts or other substantiation that they were for medical care.

Medical expense deductions for long-term care services can save thousands in taxes. But as this case shows, you must be able to prove that you have met all the requirements. For example, have a clear plan of care in writing from a licensed heath care practitioner. Keep receipts for supplies and be able to show that they relate to the taxpayer’s care.

Finally, make sure you file a tax return to claim your deduction. Lillian’s deduction may not have been questioned in the first place if it had been claimed on a properly filed return.

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