Understanding whether home health care is tax deductible can be complex, yet it’s a crucial consideration for families managing the costs of in-home care for loved ones. While there isn’t a blanket tax deduction for all types of home care, the IRS allows you to itemize and deduct specific unreimbursed medical expenses related to care received at home. This guide will clarify the rules and help you understand what aspects of home health care and in-home care may qualify for a tax deduction, optimizing your financial planning while ensuring your loved one receives the necessary support.
Home Care vs. Home Health Care: Understanding Tax Deductibility
It’s important to distinguish between home care and home health care when considering tax deductions. While neither category has an automatic, blanket tax deduction, certain expenses within both can be itemized and deducted as medical expenses on Schedule A of IRS Form 1040. The specifics are detailed in IRS Publication 502, which outlines what constitutes deductible medical expenses.
When Is In-Home Care Considered Tax Deductible?
The cost of in-home care can be tax deductible if the services are deemed medically necessary by a physician and are part of a prescribed plan of care. In-home care typically involves assistance with Activities of Daily Living (ADLs). Payments for these services can be included as deductible medical expenses if they meet the IRS criteria for qualified long-term care services. According to IRS guidelines, at least one of the following conditions must be met:
- A physician certifies that the individual requires substantial supervision due to severe cognitive impairment.
- A physician certifies that the individual is unable to perform at least two ADLs for a minimum of 90 days without substantial assistance.
Qualifying ADLs, as defined by the IRS, include:
- Bathing
- Continence
- Dressing
- Eating
- Toileting
- Transferring
However, it’s crucial to note that not all services provided by an in-home caregiver are deductible. Expenses for services like these are not deductible as medical expenses:
- Companionship
- Meal preparation (unless part of medically necessary dietary needs)
- Laundry
- General cleaning or light housework
- Running errands
To accurately determine your deductible expenses, it’s essential to track the caregiver’s time. For example, if a caregiver works eight hours daily, but only two hours are spent on doctor-prescribed ADL assistance, with the remaining six hours on non-deductible tasks, only 25% of the total home care expenses would qualify as deductible medical expenses. Maintaining a written record of daily activities from the caregiver or agency is highly recommended for clear documentation. If you’re uncertain about the deductibility of specific tasks, consulting a tax professional or elder law attorney is advisable.
Is Home Health Care Always Tax Deductible?
Generally, yes, the out-of-pocket costs for medically necessary home health care services, including skilled nursing care, are tax deductible. It’s worth noting that many home health care services may be partially or fully covered by insurance, such as Medicare and Medicaid, which would reduce the out-of-pocket expenses eligible for deduction.
Individuals receiving home health care typically have a prescribed care plan for nursing, rehabilitation, or other medical services. This care plan often simplifies the process of identifying medically necessary and thus deductible services. However, even with a care plan, it’s prudent to request that the nurse or home health aide document their activities, particularly in cases of extended care, to maintain clear records for tax purposes.
Who Is Eligible to Deduct Home Health Care Expenses?
Seniors themselves can deduct these expenses if they directly paid for their care out-of-pocket. Furthermore, if someone else, such as an adult child or another relative, pays for a senior’s out-of-pocket medical expenses, they may also be able to deduct these costs if the senior qualifies as their dependent or qualifying relative.
As per IRS guidelines, you can claim the following family and non-family members as qualifying relatives for tax deduction purposes:
- Siblings, half-siblings, and their children.
- Parents, grandparents, aunts, and uncles.
- Stepbrothers, stepsisters, stepfathers, and stepmothers.
- Sons-in-law, daughters-in-law, fathers-in-law, mothers-in-law, brothers-in-law, and sisters-in-law.
- Any person who lived with you lawfully throughout the entire year as a member of your household.
To claim someone as a qualifying relative, you must have provided more than half of their total support for the entire tax year. If these relationship and support criteria are met, you can include the qualifying medical expenses you paid for your loved one when calculating your medical expense deduction.
Calculating Your Tax Deduction for Home Health Care and Home Care: A Step-by-Step Guide
To determine the deductible amount for home health care or in-home care expenses, follow these steps:
- Calculate Your Qualifying Home Care Expenses: Determine the portion of your total annual home care expenses that meet the IRS criteria for deductible medical expenses, focusing on medically necessary services and ADL assistance.
- Determine Your Adjusted Gross Income (AGI): Your AGI is calculated by subtracting certain deductions from your gross income, including contributions to retirement accounts and other adjustments. Your AGI is a key figure on your tax return.
- Calculate Your Medical Expense Threshold: Multiply your Adjusted Gross Income (AGI) by 7.5%. According to the IRS, you can only deduct medical expenses that exceed 7.5% of your AGI. This percentage is the threshold you must surpass to qualify for the medical expense deduction.
- Subtract Your Medical Expense Threshold from Your Qualifying Home Care Expenses: The resulting figure is the amount you can deduct. Remember, this deduction can be further increased by including other unreimbursed qualifying medical expenses for yourself, your dependents, and qualifying relatives.
Example Calculation:
Let’s consider an example: Assume the cost of home care is $30 per hour. If you hire a caregiver for 44 hours per week, the annual cost would be approximately $68,640. If 70% of the caregiver’s time is dedicated to providing qualified long-term care or nursing services, the calculation for qualifying deductible expenses would be:
$68,640 x 70% = $48,048 in qualifying deductible home care expenses.
Now, let’s assume your Adjusted Gross Income (AGI) is $100,000.
Calculate the medical expense threshold:
$100,000 x 7.5% = $7,500
This means you can deduct medical expenses exceeding $7,500.
Finally, subtract the threshold from your qualifying home care expenses:
$48,048 – $7,500 = $40,548
In this scenario, you would be able to deduct $40,548 of home care expenses on your federal income tax return.
Expanding Deductions: Additional Ways to Deduct Home Care Expenses
Beyond the direct costs of medically necessary care, there are additional avenues for deducting home care expenses.
Deducting Taxes as a Household Employer
If you’ve directly hired an independent in-home caregiver, such as a private nurse or health aide, and are paying employment taxes as their employer (including state employment tax, Social Security tax, etc.), you may be able to deduct these employer taxes. IRS Publication 926 provides detailed guidance on this specific tax situation. However, if you hire a caregiver through a home care or home health agency, these employment tax expenses are not deductible because the caregiver is an employee of the agency, not you.
Home Modifications for Medical Needs
The IRS also permits deducting expenses for medically necessary home modifications, provided these modifications are not intended to increase the property’s value. Examples of deductible home modifications include:
- Constructing entrance and exit ramps for accessibility.
- Widening doorways and hallways to accommodate wheelchairs or walkers.
- Lowering kitchen countertops or modifying kitchen equipment for accessibility.
- Installing railings or support bars in hallways and bathrooms to prevent falls.
Navigating the Tax Landscape: Resources and Further Assistance
Tax regulations can be intricate, and it’s always prudent to consult with a qualified tax preparer if you have questions or uncertainties about deducting home care or home health care expenses.
While tax deductions can offer some financial relief, home care and home health care can still be substantial expenses. Explore various payment options to manage these costs effectively. Options include public insurance programs like Medicaid, private pay resources, long-term care insurance, or a combination of these. Investigating all available resources can significantly help in stretching your budget for home care.
For personalized guidance at no cost, consider reaching out to Senior Living Advisors at A Place for Mom. They can provide support in finding home care agencies that align with your loved one’s needs, lifestyle, and budget.
Frequently Asked Questions About Home Health Care Tax Deductions
Are there income or itemization requirements to deduct home health care costs?
No, there are no income limits to deduct medically necessary home care costs. However, to claim this deduction, you must itemize deductions on Schedule A rather than taking the standard deduction.
What is the distinction between general medical expenses and home health care expenses for tax deductions?
The key difference lies in the services provided. While all qualifying medical expenses exceeding 7.5% of your AGI are deductible, home health care may encompass both medical and non-medical services. Only the expenses directly related to medical care and qualified long-term care services are deductible. Non-medical expenses like household chores or companionship within home health care are not deductible.
Are medical supplies, equipment, or medications used in home care tax deductible?
Yes, according to IRS Publication 502, unreimbursed costs for medical supplies, equipment, and medications that are used as part of home care are deductible medical expenses.
Do state tax rules differ regarding home health care deductions?
Yes, state tax laws vary. While federal guidelines determine deductibility on your federal income tax return, states have their own rules regarding medical expense deductions on state income tax returns. It’s important to check your state’s specific regulations.
