New Tax Break for Caregiver Costs

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Providing care for someone with Alzheimer’s or dementia can be an expensive, long-term problem.  (You know this already, right?  Or been thinking about it?  Sooner or later, everyone thinks about it.)

Now you can catch a break.

On July 5th, 2011, the United States Tax Court held that expenses you incur for providing unlicensed caregivers will be deductible on your income tax return.

(For years the IRS didn’t allow this deduction.  The Tax Court said they were wrong.   That happens more often than you think.)

Here’s the story. A woman was diagnosed with dementia in 2004, so her doctor prescribed appropriate medications and sent her home, where she lived by herself.  But the woman was hospitalized again, and the hospital noted that the woman had not been taking her medicines.  She was hospitalized once again, and the question came up: was it really safe for her to live alone?

By 1996, the question was resolved in writing.  Her physician wrote that the woman’s ability to communicate orally was impaired.  She was confused.  She needed assistance with normal activities.  She needed supervision because of her failed memory.  And she couldn’t be left alone for fear of her falling.

Thus, the doctor concluded she required homecare services; she required assistance and supervision all day every day for both medical reasons and to insure her personal safety.

The woman’s brother had her power of attorney, and so he took over her personal and financial affairs.  That included his hiring two 24-hours-a-day caregivers, who were not licensed healthcare providers.  But they did just fine, helping the woman with her bathing, dressing, trips to the doctor, taking her medications, and getting in and out of her wheelchair.

The woman eventually passed away, and her brother dealt with her final affairs, including her final income tax return.  And that’s when the problems started.

The brother had paid the caregivers just short of $50,000 for their services.  He treated that amount as an itemized medical expenses tax deduction on his sister’s tax return.

The IRS took the position that he couldn’t do so.  Part of the Internal Revenue Code says “long term care services” are “services [are] required by a chronically ill individual and provided pursuant to a plan of care prescribed by a licensed health care practitioner.”

The brother read the whole definition carefully.  He decided that the Service’s denial of the deduction for his sister’s care was flat-out wrong because:

  • His sister was chronically ill,
  • the doctor was a licensed healthcare practitioner, and
  • the doctor had laid out a plan.

The evidence: the doctor, the licensed health care practitioner treating the woman, determined that she was chronically ill.  The doctor also had determined that 24-hour-a-day supervision for the woman’s health and safety was necessary to protect her from the consequences of her dementia – a plan.

(By the way, you don’t need to be a doctor to be a “licensed health care practitioner.”  Registered professional nurses, licensed social workers and others are covered by the definition.)

But didn’t the 24-hour-a-day caregivers have to meet this “licensed practitioner” definition?  Nope. They just had to be operating under the plan which the doctor devised.

The bottom line: the Tax Court held that the woman was entitled to a medical expenses tax deduction for the $49,580 paid to her ‘round-the-clock caregivers. 

There are two morals of this true case.

First, whoever’s paying the non-licensed caregivers may be entitled to deduct 100% of what they paid.

Second, assume nothing and don’t believe a non-expert’s opinion. It’s worth checking out the law, regulations and cases; you never know what’s in place – here, as recently as July 5th, 2011.