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Posted March 12, 2006

Ask An Expert

Taxes: Paying Caregivers -- and the Law

Q. My dad was diagnosed with dementia in March 2005. I am his daughter, and I'm all he has. Since last November, I acquired a wonderful caregiver for my dad. She is really doing a good job. Plus, her husband helps out. My dad likes them and has built a trust in them.

My question is that I have been paying for her services in cash. Right now she is going through some personal matters, and I am unable to claim her. It has been an agreement between us that I would not turn the money I pay her into the IRS until her personal situation is settled. My dad has a good living trust, which helped me to attain the Power of Attorney, Attorney in Fact -- you name it, I'm it. Some of my dads' bank accounts have my name on them, which has made it easy for me to take care of his financial matters. I am drawing the cash out monthly so I can pay the caregiver in cash.

Can this be a problem for me later on because I am not claiming it on his taxes? I keep a ledger of every check I write for him, and have kept all receipts. I am even keeping a log of all cash drawn out for caregiving. I was just concerned that later, when the time comes, they may question my intentions in drawing out those large sums of money that I am not turning it in to the IRS.

Since my dad has gotten worse, the caregivers are there 7 days/nights a week, costing $120 per day and $125 per night, averaging approximately $1,715 per week. When my dad was doing better, he was told about this and it was OK with him. He liked the caregiver, and I promised him that I would do everything I can do to keep him in his home and not put him a care home. Any input you may have on this matter would be greatly appreciated. (This past year has been the most stressful time of my life. I live alone and have my own house to care for -- never married, no children -- so I have been totally alone in his caregiving. I would just like to have peace of mind knowing that I can continue doing this the way I have been because there are so many other things I need to stay focused on, like doing his taxes, doctor and dentist appointments, etc. I am in the process now of seeking help with the problems he is having from the result of the psychotic medications they prescribed to him, which I am learning now can do him more harm than good. During the first 5 to 6 months he was on Seroquel, now he's taking Abilify and Haldol, which studies show are very harmful to the brain and cause more damage than good. Anyway, sorry to ramble on.)

I know that it would be helpful for my dad's financial situation to be able to claim this money on his taxes. Yet, more importantly, I would rather see him happy and in his home than to lose these caregivers that he trusts and who have formed a caring bond with my dad. They care about him, and that is worth all the money in the world to me. And, just to state for the record, I don't think any other caregiver could handle my dad with what is going on with him, plus taking care of his dog and cat. Both of my dad's pets love them, too. They cook healthy meals, do housework, laundry, assist with meds, assist me in taking him to appointments, some shopping, and taking my dad and his dog for rides. What is really important to me is that they are taking the time to teach me and to work with me so we are all in tune with working with my dad.

When I am home at my house, they call me on the phone when he is having a lucid moment so I can talk with him. I guess the best way to say it is that they have become like a family to me, and we all work good as a team for the benefit of my dad to have the best quality of life possible for him. Please let me know of any information you may have on not claiming to the IRS the caregiving fees. Thank you so much for your time. God Bless You.



 

Gail C., San Leandro, California.

A. Caregivers who work in a taxpayer's home, and who are not hired through an agency, are considered "household help."  Despite the fact that your father's caregivers seem like nice people, and despite your best intentions, you (on behalf of your father) are breaking the law by not reporting their earnings.

Their earnings are reported on Schedule H of your father's income tax return each year, and he (or you, with a power of attorney for him) is responsible for paying employment taxes (Social Security, Medicare and federal unemployment tax) on their wages.  You can either withhold their share of Social Security and Medicare taxes with each payment, or pay it for them (which effectively raise their income).

State unemployment tax also needs to be paid, and this does not go with the income tax return, but must be filed with your state office of unemployment, with which you must register. In some states, you must also purchase a workmen's compensation insurance policy. You need to check this out locally.

Clearly, your father's failing health is difficult enough to deal with, and having the extra burden of income tax compliance is an unfortunate consequence. However, this is the result of hiring independent contractors as caregivers.

I advise calling the IRS and requesting Publication 926, as well as Schedule H and the instructions.

By not complying with the law, you are facing potential tax problems in the future.  You may want to consult a certified public accountant to help you comply with these rules.

Whatever excuses your caregivers offer for not wanting their earnings reported cannot be used for your father (or you) to break the law.

This answer has been provided by Carol I. Katz, MS, CPA/PFS, CFP, CVA, the Deputy Tax Director at Leonard J. Miller & Associates, Chartered, in Baltimore, Maryland . Carol Katz works exclusively in the tax and financial planning areas, has been published in professional journals and has discussed tax issues on television and public radio. She can be reached at carolkatz@lenmiller.com.

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