|Planning for long-term care involves more than the preparation of powers
of attorney and counseling on possible asset transfers to qualify for Medicaid
reimbursement. Steps also should be taken to make certain that the person receiving care
continues to file an income tax return and does so at a minimum possible income tax cost.
should be familiar with the procedure for filing a return on behalf of an incapacitated
individual. The medical expense deduction, while of little importance for most taxpayers,
is critical for many elderly, particularly for those receiving long-term care.
Long-term care insurance and life insurance may be tapped as a financial resource for
paying the costs of long-term care without fear of adverse tax consequences. Significant
tax benefits also are available to families contributing to the cost of care.
When counseling an individual or an individual's family on long-term care,
practitioners may wish to consult the following checklist.
Signing the return
An income tax return for an incapacitated taxpayer may be signed by:
A legally authorized representative, such as a
conservator, I.R.C. §6012(b)(2);
An agent under a durable power of attorney if the
power authorizes the agent to handle tax matters and a copy of the power of attorney is
attached to the return, Treas. Reg. §1.6012-1(a)(5); or
The spouse signing the incapacitated person's name
to the return if the spouse adds that it is being signed "by Husband (or Wife)"
and attaches a statement to the return explaining why the other spouse cannot sign. Treas.
When representing an individual of declining capacity, the practitioner should be alert
to possible errors on the return. If an error is discovered, I.R.C. §6511 requires that a
claim for refund normally be filed by the later of three years after the filing of the
return or two years after payment of the tax. However, the limitations period is suspended
during any period that:
The taxpayer is unable to manage financial affairs
by reason of a medically determinable physical or mental impairment which can be expected
to last for at least one year or result in death; and
The taxpayer, during such period of disability, is
not represented by a conservator, agent under a durable power of attorney, or other person
authorized to handle financial matters. I.R.C. §6511(h).
Supporting a parent
Children supporting a parent may be able to claim a personal exemption for the parent
and deduct the parent's unreimbursed medical expenses which the child has paid. Children
paying for a parent's care, either with their own or their parent's funds, should also be
aware of the rules on payroll withholding for home and domestic workers.
A child may claim a personal exemption for a parent if the parent:
Has gross income of less than the personal
exemption amount ($2,750 in 1999);
Did not file a joint return for the year; and
Qualifies as the child's dependent. I.R.C. §151.
A parent qualifies as the child's dependent if the parent:
Received over half of his or her support from the
child during the taxable year; and
Is a U.S. citizen, resident or national, or a
resident of Canada or Mexico, for at least part of the taxable year. I.R.C. §152; Treas.
Eligible support, whether provided by the parent or child, includes:
Food, shelter, clothing, medical care and similar
Benefits provided in-kind, such as the fair rental
value of in-law quarters in the child's home; and
Social Security benefits expended on above items
but not Medicare or Medicaid reimbursements. Treas. Reg. §1.152-1(a)(2); Rev. Rul.
79-173, 1979-1 C.B. 86.
Funds received by a parent only count in the support equation to the extent actually
expended on support. Treas. Reg. §1.152-1(a)(2)(ii). To assure that the child pays for
more than half of the parent's support needs, the child and parent should carefully
coordinate expenditures and the source of funds used.
While a child must ordinarily contribute more than half of a parent's support to claim
a personal exemption for the parent, a child contributing less than 50 percent is entitled
to the exemption if:
The child contributes at least 10 percent;
The child and other persons, as a group,
contribute more than half the parent's support;
The other persons who have each contributed at
least 10 percent sign declarations renouncing a right to claim the exemption, ordinarily
on Form 2120;
The child claiming the exemption attaches the Form
2120 to the child's return. I.R.C. §152(c).
Parent's medical expenses
For a child to deduct on the child's return the medical expenses of the parent which
the child has paid, the parent must qualify as the child's dependent under the test
described above. I.R.C. §213(a). Eligibility to also claim a personal exemption for the
parent is not necessary. Medical expenses paid by a child are deductible on the child's
return if the parent qualified as the child's dependent either on the date the services
were incurred or on the date payment was made. I.R.C. §213(a); Treas. Reg.
Before paying a parent's medical expenses in the hope of receiving a deduction, the
child should make certain that the other requirements for the deduction are met. The child
must have sufficient other deductions in order to itemize rather than claim a standard
deduction. Also, even if the child itemizes, medical expenses are deductible only to the
extent they exceed 7.5 percent of adjusted gross income. I.R.C. §213(a).
Withholding for domestic help
FICA (Social Security and Medicare tax) withholding is required on domestic help hired
to provide care if the worker is paid more than $1,100 during the year (1999 figure).
I.R.C. §§3102(a), 3121. FUTA (unemployment tax) withholding is required if a care worker
or workers were paid more than $1,000 in compensation during any quarter of the current or
preceding calendar year. I.R.C. §§3301, 3306. Withholding of both FICA and FUTA may be
reported on Schedule H to the Form 1040 and paid with the filing of the return.
Withholding is required if:
The worker is a nonprofessional such as a nurse's
aide or personal attendant; and
The worker is the employee of the taxpayer and not
of an agency, measured by factors such as authority to hire, fix the rate of compensation
and write the paycheck. Rev. Rul. 61-196, 1961-2 C.B. 155.
If a domestic worker is classified as the taxpayer's employee, the taxpayer, in
addition to any required FICA or FUTA withholding, must prepare a W-2 but need not
withhold income tax. I.R.C. §3401(a)(3).
Medical expense deduction
The costs of providing long-term care are deductible as medical expenses under I.R.C.
§213 if the person receiving care is a "chronically ill individual" and the
expenditures are for "qualified long-term care services" as defined in I.R.C.
§7702B. Qualified expenses are deductible whether provided in a facility or private
residence. The expenses are deductible if paid directly by the parent; if paid by the
child, the parent must qualify as the child's dependent under the test described above.
Like other medical expenses, eligibility to claim the deduction is beneficial only if the
taxpayer itemizes and total medical expenses paid exceed 7.5 percent of adjusted gross
To claim a deduction for paying the expenses of long-term care:
The expense must be incurred to provide necessary
diagnostic, preventive, therapeutic, curing, treating, mitigating, rehabilitative, or
maintenance or personal care services;
The services must be provided pursuant to a plan
of care prescribed by a licensed health care practitioner (physician, registered nurse, or
licensed social worker); and
The taxpayer must be a "chronically ill
individual" as certified by a licensed health care practitioner, requiring either:
(a) a severe cognitive impairment necessitating substantial supervision to protect health
and safety; or (b) a functional inability without substantial assistance to perform for at
least 90 days at least two of six activities of daily living (eating, toileting,
transferring, bathing, dressing and continence).
The premiums for long-term care insurance purchased by an individual are deductible as
medical expenses under I.R.C. §213(d) if:
The policy is tax-qualified (covers qualified
long-term care services of chronically ill individual plus other requirements - check
specific policy for required certification by insurer);
The policy is not offered under either a cafeteria
plan or flexible spending arrangement;
The annual premium does not exceed caps based on
the insured's age, ranging from $210 per year (in 1999) for an individual age 40 or less,
to $2,650 for an individual age 71 or older (partial deduction available if cap exceeded);
The benefits paid will not exceed the actual costs
of care or a daily indemnity of $190 (in 1999).
Accelerated death benefits
The proceeds of a life insurance policy sold to an investor under what is known as a
viatical settlement or which are paid out by the insurance company under an accelerated
benefits rider are fully excludable from gross income if the insured's basis in the policy
(premiums paid less dividends and other returns) exceeds the proceeds received. Otherwise,
proceeds paid to a living insured are excludable from gross income only if the payment
qualifies as an accelerated death benefit under I.R.C. §101(g). To exclude the proceeds
under I.R.C. §101(g), the insured must be either:
"Terminally ill," requiring a
certification by a physician that the insured's death is reasonably expected to occur
within 24 months; or
"Chronically ill," applying the same
definition as applies for purposes of deducting direct payment of long-term care costs or
premiums on long-term care insurance.
Practitioners also should be aware of the following.
Proceeds paid to terminally insureds are fully
excludable from gross income, no matter how applied, but the exclusion for insureds who
are certified as chronically ill is limited to the amount of qualified long-term expenses
or the $190 daily limit;
Proceeds from a sale to a "viatical
settlement" provider qualify for the exclusion only if the provider is licensed by
the state or meets standards established by the National Association of Insurance
The exclusion is not available if the policy is
owned by a business in which the insured is an employee, officer or director or has a
Kandis Scott teaches evidence, negotiation and
clinical courses at Santa Clara University School of Law and formerly provided legal
services for the poor and elderly. David English teaches wills and trusts, estate and gift
taxation, estate planning and elder law, also at the Santa Clara law school. This semester
he is the Fratcher Visiting Professor at the University of Missouri's Columbia Law School.