Eldercare Can Be a Substantial Medical Deduction

Article Highlights:

•  Incapable of Self-Care
  o   Physical or Mental Defect
  o   Incapable of Fulfilling Hygiene or Nutritional Needs
  o   Requirement for Full-Time Care
  o   Documentation and Certification
• Assisted-Living Facilities
• Meals and Lodging
• Home Care
• Nursing Services
• Caregiver Agencies
• Household Employees
• Employee Retirement Plan

Because people are living longer now than ever before, many individuals are serving as care providers for elderly loved ones (such as parents or spouses) who cannot live independently. Such individuals often have questions regarding the tax ramifications associated with the cost of such care. For these individuals, the cost of such care may be deductible as a medical expense. Of course, any eligible deduction would be claimed by the person receiving the care if he or she is the one who pays the expenses. If someone else is paying the costs, that person may qualify to claim the deduction as explained below for “Medical Dependent.”

Incapable of Self-Care –When considering a potential tax deduction related to eldercare and determining if an elderly person is incapable of self-care for tax purposes, there are specific and nuanced criteria involved. This concept is particularly relevant for tax benefits and credits that pertain to caregiving expenses. Here’s an expanded look at what constitutes being "incapable of self-care" in the context of eldercare:

• Physical or Mental Defect
  
  1.    Physical Defects: These include conditions that impair mobility, dexterity, or other bodily functions. Such conditions might result from chronic illnesses, injuries, or age-related degenerative diseases like arthritis or osteoporosis, which can make it challenging for the elderly person to maintain personal hygiene or manage daily activities independently.
  
  2.    Mental Defects: Cognitive impairments, such as those caused by Alzheimer's disease, dementia, or other neurological disorders, fall under this category. These impairments can significantly hinder an individual’s ability to make sound judgments, manage daily tasks, or ensure personal safety.
  
  
• Incapable of Fulfilling Hygiene or Nutritional Needs
  
  1.    Hygiene Needs: Being incapable of self-care often means the individual cannot perform essential personal hygiene tasks. This includes difficulties with bathing, dressing, grooming, and using the bathroom without assistance.
  
  2.    Nutritional Needs: This aspect refers to the inability to prepare meals, feed oneself, or follow dietary restrictions prescribed for medical conditions. The individual might also struggle with recognizing when they need to eat or drink.
  
  
• Requirement for Full-Time Care
  
  1.    Ensuring Personal Safety: Many elderly individuals may not be able to recognize or respond to hazardous situations, such as falling or leaving stoves unattended. Full-time caregiving ensures they are supervised to prevent accidents.
  
  2.    Ensuring the Safety of Others: In some cases, the person’s condition might pose a risk to others due to unpredictable behaviors or cognitive impairments. Full-time care helps manage these potential risks.
  
  3.    Supervision for Medication and Health Management: Elderly persons incapable of self-care may require assistance with medication, managing health devices (like oxygen tanks or mobility aids), and attending medical appointments.
  
  
• Documentation and Certification
  
  1.    Physician's Certification: A healthcare professional may need to certify the individual's condition to qualify for tax deductions related to eldercare. This documentation may require detailed assessments of the person's physical and mental capabilities.
  
  2.    Care Plan Documentation: Having a documented care plan that outlines the specific needs and level of care required can support claims of being incapable of self-care for tax purposes.

Assisted-Living Facilities – Generally, the entire cost of care at a nursing home, home for the aged, or assisted-living facility is deductible as a medical expense, provided that the person who lives at the facility is primarily there for medical care or is incapable of self-care. This includes the entire cost of meals and lodging at the facility. On the other hand, if the person is living at the facility primarily for personal reasons, then only the expenses that are directly related to medical care are deductible, and the cost of meals and lodging is not a deductible medical expense.

Home Care – A common alternative to nursing homes is in-home care, in which day helpers or live-in caregivers provide care within the home. The services that these caregivers provide must be allocated into (nondeductible) household chores and (deductible) nursing services. These nursing services need not actually be provided by a nurse; they simply must be the same services that a nurse would normally provide (e.g., administering medication, bathing, feeding, and dressing). If the caregivers also provide general housekeeping services, then the portion of their pay that is attributable to household chores is not deductible.

The emotional and financial aspects of caring for a loved one can be overwhelming, and as a result, caregivers and/or the individual receiving the care often overlook their burdensome tax and labor-law obligations. Sadly, these laws provide for no special relief from these tasks.

Is the Caregiver an Employee? – Because of the way that labor laws are written, it is important to determine if an in-home caregiver is an employee. The answer to this question can be very subjective. Caregivers’ services can be obtained in a number of ways:

•  Agency-provided caregivers are employees of the agency, which handles all the responsibilities of an employer. Thus, loved ones do not have any employment-tax or payroll-reporting responsibilities; however, such caregivers generally come at a substantially higher cost than others.
  
  
• Household workers are typically classified as employees and are subject to having Social Security and Medicare taxes withheld. The employer is responsible for withholding the employee’s share of these taxes and paying the employer’s share of payroll taxes. Fortunately for these employers, some special federal rules for household employees greatly simplify the payroll-withholding and income-reporting requirements. Any resulting federal payroll taxes are paid annually in conjunction with the employer’s individual 1040 tax return. Federal income-tax withholding is not required unless both the employer and the employee agree to do so. However, the employer is still required to issue a W-2 to the employee and to file that form with the federal government. The employer also must obtain federal and state employer ID numbers for reporting purposes.
  
  Some states have special provisions for the annual reporting and payment of state payroll taxes; these may be like the federal requirements. Other states have no special provisions, and the household employee is then treated the same as an employee of a business.
  
  Household employers may find it easier to engage a payroll service that is knowledgeable in household employees, often referred to as Nanny Payroll Services, to handle the hassles of payroll and associated reporting paperwork.
  
  The employer’s portion of all employment taxes (Social Security, Medicare, and both federal and state unemployment taxes) related to deductible medical expenses are also deductible as a medical expense.

You may be thinking, “Wait a minute – the household employers I know pay in cash and do not pay payroll taxes or issue W-2s to their household employees.” This observation may be accurate, but such behavior is illegal, and it is not right to ignore the law. Think about what could happen if one of your household employees is injured on your property or if you dismiss such an employee under less-than-amicable circumstances. In such circumstances, the household employee will often be eager to report you to the state labor board or to file for unemployment compensation.

Note, however, that gardeners, pool cleaners, and repair people generally work on their own schedules, invest in their own equipment, have special skills, manage their own businesses, and bear the responsibility for any profit or loss. Such workers are not considered household employees.

Here are some additional issues to consider:

Overtime – Under the Fair Labor Standards Act, domestic employees are nonexempt workers and are entitled to overtime pay for any work beyond 40 hours in a given week. However, live-in employees are an exception to this rule in most states.

Hourly Pay or Salary – It is illegal to treat nonexempt employees as if they are salaried.

Separate Payrolls – Business owners may be tempted to include their household employees on their companies’ payrolls. However, any payments to household employees are personal expenses and thus are not allowable as business deductions. Thus, business owners must maintain separate payrolls for household employees; in other words, personal funds (not business funds) must be used to pay household workers.

Eligibility to Work in the U.S. – It is illegal to knowingly hire or continue to employ an alien who is not legally eligible to work in the U.S. When a household employee is hired to work on a regular basis, the employer and employee each must complete Form I-9 (Employment Eligibility Verification). The employer must carefully examine the employee’s documents to establish his or her identity and employment eligibility.

Employee Retirement Benefits – Although not a requirement for hiring household help, a recent tax law change permits employers of domestic employees (e.g., nannies and caregivers of adults) to provide retirement benefits for such employees under a Simplified Employee Pension plan.

Across the United States, an increasing number of states are implementing mandatory retirement savings programs that may impact families employing household workers like nannies, caregivers, or housekeepers.

If you employ domestic help, you should be on the lookout for state mandates requiring either provide a private retirement plan or enrolling employees in a state-sponsored programs.

For example, in California, a state mandate requires all household employers with at least one W-2 employee to either provide a qualified retirement plan or register for the CalSavers program. 

Medical Dependent – Generally, to claim a deduction for medical expenses, the taxpayer must have incurred the expense for him- or herself, a spouse or a dependent. An individual (other than a qualifying child) will qualify as a dependent of the taxpayer if the individual is related to the taxpayer or lives with the taxpayer all year, has gross income of less than $5,300 for 2026 (up from $5,200 in 2025), doesn’t file a joint return with their spouse, and receives more than half their total support for the year from the taxpayer. However, there is an exception for a “medical dependent” that allows the taxpayer to include the medical expenses they paid for an individual who would have been their dependent except that the individual received gross income of $5,300 or more or the individual filed a joint return for the year.

If you have questions about tax-related issues regarding eldercare or about how your state deals with related employment issues – or if you would like assistance in setting up a household payroll system – please contact this office.