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Posted December 29, 2006

Ask An Expert

Taxes: How to Report Caregiving Income

Q. We have started taking care of an elderly friend in our home. The guardian pays us $2,000 a month. Is the money to be shown as income even though there are many expenses and time on our part in taking care of our friend?

Ronda N., Carson City, Nevada.

A. This appears to be income you are earning for providing a service to your friend. The only way it would not be income would be if it was a gift from your friend to you, and this does not seem to be what is taking place.

Because you are providing a service, you will be allowed to deduct expenses you incur in providing the service. Expenses would include food, supplies, and other expenses for the care of your friend. You described the care with "we," so that if two of you are providing services, you will both have income -- and you will need to decide how it is split by which of you if providing more of the service, unless it is really 50/50.

The income and applicable expenses would be reported on Schedule C of your income tax return, and you will also need Schedule SE to pay self-employment tax on the net income. You even may need to make quarterly federal and state estimated tax payments to pay tax on these earnings because there will be no withholding on this income.
If you have separated one room of your home to provide the service, you may be able to deduct a portion of the utilities, as well as other expenses based on the square footage of the home that is used for this purpose. Try reading the instructions to Form 8829 to see if you might qualify to deduct these additional costs.

In a non-tax matter, check with the provider of your homeowner's insurance to see if you might need additional coverage in this special situation.

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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