Many older adults want to stay in their own homes but cannot do so because of health or other reasons. A home health care agency might be able to help them find an aide to come to their homes for a certain period each day or on some other set schedule.
Who pays the home health care aide determines the tax issues for the older adult. Therefore, when an aide is hired, the method of payment needs to be discussed before the hiring occurs.
Home Health Care Aides as Agency Employees
How the aide is paid might depend on the practice in the older adult’s region of the country. Some home health care agencies pay aides as employees; contracts are then between the agency and clients, who pay the agency directly. The caregiver (the aide) is not part of the payment arrangement. The agency submits a bill to the client and prepares a paycheck for the aide.
This arrangement is the easiest way for an older adult to pay for help, and the agency’s invoices provide proof of the medical expense for tax purposes. The older person does not need to keep paperwork other than the service contract with the home health care agency and payment receipts.
Home Health Care Aides Hired Directly by the Older Adult
In some cases, the home health care agency provides the older adult with a list of possible aides; the older adult then hires an aide and pays the agency a finder’s fee.
In this situation, the relationship between the agency and the older adult usually ends there. The older adult is an independent employer and must pay the aide directly; and pay the employer’s portion of FICA, Social Security, and Medicare taxes; and withhold the employee’s portion of these taxes from the aide’s payments.
In certain cases, depending on the amount paid to the aide, the older adult must also issue a W-2. The older adult must also follow specific rules to deduct the payments to the aide as a medical expense.
The invoices submitted by the health aide must state the charges for various services; not all services are deductible medical expenses. For example, housecleaning, driving to the grocery store or completing errands, or making phone calls for the older person are not deductible medical expenses.
In all cases, remember that home health care expenses that have been reimbursed (for example, by Medicare, Medicaid or long-term care insurance) are not eligible for income tax deductions.
Consult with a qualified tax expert to identify reimbursable health care and medical expenses that you are allowed based on your adjusted gross income (AGI). Certain medical expenses that exceed 7.5 percent of AGI are tax deductible for those 65 or older who itemize through December 31, 2016; then the threshold becomes 10 percent.
Sources
Gordon, Paul. "Special Issue Brief. Medical Expense Tax Deductions: A Guide for Senior Living Providers and Residents," The American Seniors Housing Association (Summer 2012).
Internal Revenue Service. www.irs.gov.
Society of Certified Senior Advisors, Working with Older Adults: A Professional’s Guide to Contemporary Issues of Aging (2015).
"Tax Aide Program," AARP.
"Proposed New Requirements for Tax Return Preparers," Tax Information for Tax Professionals (2010).
TaxBook 1040 Edition (2012). 2012 Tax Year. Minnetonka, MN: Tax Materials Inc.
The Working with Older Adults course offered by the Society of Certified Senior Advisors gives professionals a practical, comprehensive understanding of health, social and financial issues that are important to many older adults, including ethical issues specific to aging. For more information, or to enroll in a class, click here.
