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Posted September 15, 2008

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Taxes: Claiming a Deduction for Caregiving

Q. Q.   I have taken my father into my home (he's 90 and with dementia) after a nursing home did not work out due to his behavior. I am trying to work out a caregiver agreement with my mother and come up with a fair financial setup. I am also my father's power of attorney and have access to some of his funds. So, can I pay my own taxes as a self-employed caregiver.

Are there any tax deductions I can take given that, besides breaks 2-3 times a week, I am his caregiver 24/7 and he is in my home and I feed him, etc?

Deborah J., St. Louis, Missouri.

A.  You cannot take any deductions for food.  However, you may be able to claim him as a dependent if he meets the definition of "qualifying relative" or "qualifying person".  Go to the Internal Revenue Service website at www.irs.gov and review IRS Publication 501 for more information.  Even if the exemption is not available because your parents will file jointly, you may qualify for head of household filing status.  That same IRS publication says:

"You may be able to file as head of household if you meet all the following requirements.

(1) You are unmarried or "considered unmarried" on the last day of the year.

(2) You paid more than half the cost of keeping up a home for the year.

(3) A "qualifying person" lived with you in the home for more than half the year (except for temporary absences, such as school). However, if the "qualifying person" is your dependent parent, he or she does not have to live with you. See Special rule for parent, later, under Qualifying Person.

Tax Tip. If you qualify to file as head of household, your tax rate usually will be lower than the rates for single or married filing separately. You will also receive a higher standard deduction than if you file as single or married filing separately."

There’s another interesting possibility to consider: there is the potential to not include your income as self-employment income, but just "other income."  There is an IRS Private Letter Ruling (PLR 9401013) that allowed parents to exclude from self-employment income the fees they received from the state for taking care of their disabled child.  Because you may be doing this more out of love than as a business, you may want to look into this possibility.  The risk is that if the IRS does not agree, you would then owe the self-employment taxes and interest and penalties.  So, if the amount is large enough you may want to seek legal counsel on that issue.

This answer has been provided by Carol I. Katz, MS, CPA, 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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