Benefits Planning with Income Tax Deductions

Co-authored by Janet W. Moore

FrankandMaryThis is the first of a series of blog posts on real-life situations that may apply to you and your family, where the solutions involve some combination of government benefits planning and tax planning. This week, we’re going to discuss a situation involving an older couple living at home. Next week, we’ll talk about that same couple in an assisted living facility, or when one of them needs nursing home care.

Suppose Frank and Mary live at home, and that Mary is suffering from dementia at some level. Often, a person with early-stage dementia can still get around the house, but Frank really can’t leave Mary alone, for fear that she may wander off. Frank also needs to be around when Mary showers or uses the bathroom, to make sure she does not fall. Frank doesn’t think they qualify for any government benefit programs because they have assets (not counting their home) of more than $300,000, consisting mostly of savings and retirement funds. Frank has made inquiries and found that getting a home care person to come in to help will cost about $25 per hour. Frank and Mary’s income consists of their social security checks and a small pension, together with annual distributions from their retirement accounts. Their total income is around $50,000 per year. What can they do? What could you do in a similar situation?

First and foremost, you need to find out if you qualify for any of the government benefit programs available here in Massachusetts. How do you do that? By contacting your regional Aging Services Access Point (ASAP). For Worcester and the immediately surrounding communities the ASAP is Elder Services of Greater Worcester, and for the Boroughs and much of Metrowest the ASAP is Baypath Elder Services.

While Frank and Mary’s combined incomes would be too high in this case to qualify them for the Basic and Enhanced Community Options Program (ECOP), which provides community services to aid elders to remain home, they might qualify for the much larger MassHealth Frail Elder Waiver (FEW) programs. A person would be eligible for the FEW as long as (1) the gross income of the person in need of services is less than $2,130 per month and (2) that person has less than $2,000 in countable assets. There is no limit on the countable assets of the well spouse. In this case, Mary could transfer all the assets to Frank, thereby reducing Mary’s assets to under $2,000. As long as Mary’s remaining income (presumably only her Social Security and pension income) is under $2,130 per month, the ASAP can authorize home care services, sometimes as much as 40 hours per week, all paid by MassHealth.

But what if Mary has too much income, or for some reason the assets cannot be transferred to Frank, or what if Mary needs more home care than the amount paid by MassHealth? Payment for these services might be a tax-deductible medical expense. That tax deduction could save a lot of money in ways that you may not have considered.

The income tax deduction for medical expenses applies to all medical expenses in excess of 10% of the taxpayer’s adjusted gross income. Medical expenses include payment for home care workers as long as (1) the person needing the care has been certified by a health care professional as chronically ill for at least 90 days; (2) the person receives “personal care services” because he or she needs physical help, or because he or she might be in danger without supervision; and (3) the services are provided by an individual who is not a relative. So if Frank and Mary have taxable income of $50,000 and have paid for home care services for Mary, the expenses over $5,000 may be tax-deductible medical expenses.

But what if Frank and Mary’s taxable income is too small to take advantage of the medical deduction but too large to qualify for benefits? An alternative, especially if the cost of home care will be substantial, might be to give some of your savings to one of your children, preferably one in a high income tax bracket. That child could then use the money from the gift to pay for your home care. If your child itemizes deductions, he may deduct his own medical expenses and those of his spouse and dependents to the extent the expenses exceed 10% of the child’s adjusted gross income. “Dependent” is defined in Section 152 of the Internal Revenue Code. A “qualifying relative” who may be a parent for whom a child provides over half of the parent’s support for the calendar year, can be a dependent of the child. As long as the amount the child has paid for medical expenses exceeds 50% of the total amount of the parent’s “support”, the child could take all of the home care payments as a “medical deduction”, assuming there are sufficient combined medical expenses for the child, his family and the parent’s expenses that exceed the 10% floor for medical deductions. The deduction for medical expenses could produce considerable tax savings for your child.

Obviously, this kind of planning is complicated and will vary according to your own family, financial, and medical situation, so you should work with your lawyer and your accountant. That being said, getting these combined strategies right could mean the difference between economic security and poverty, especially for families cursed by the scourge of Alzheimer’s or other debilitating diseases that require extensive home care.

If you have a real life situation that you’d like me to analyze, and you don’t mind my using your example in a later blog post (while keeping your name confidential), please contact me by calling 508-929-1652 or emailing  Duck

About Arthur Bergeron

Art has been practicing law in Massachusetts for over 30 years. He focuses his practice on elder law, estate planning, probate and trust administration, and land use matters. Art counsels senior citizens and their loved ones regarding elder law and special needs planning, asset protection and Medicaid planning. He works with individuals in all areas of estate planning, including wills, trusts, durable powers of attorney, health care proxies and living wills.
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