Do we have to pay taxes on the money Mom pays me to take care of her?
If my mother lives with us and pays us money for me to take care of her, do we have to report this to the IRS? And if she does not report it to the IRS, is this wrong?
If your mother pays you money to act as her caretaker, this is taxable income and should be reported as income on your income tax return. It is not necessary for your mother to report anything to the IRS or do any income tax withholding if you are considered an independent contractor. Your mother may be able to take some or all of the caretaking expenses as a medical expense deduction if her total medical expenses are more than 7.5% of her adjusted gross income and some of your caretaking activities qualify as medical expenses. You should discuss this with an accountant in detail to determine what you may be able to do in your particular case.
If mother pays more than $600 in a year to one individual, does she have to furnish Form 1099?
You legally have to report any income paid to you for caretaker services, however, her share of groceries, utilities etc. would not be salary to you. Her costs for personal items and clothing would not be part of your salary, nor would her medical bills, or repayment of expenses for transportation. Also, she can give you a gift of up to $13,000 each year tax free ($26,000 if you split it with your husband). See a tax book such as J.K. Lasser's 2010 or ask your accountant for more details. Hope this was helpful.
I've been through this quite extensively with my mom and her acct. and this is how I understand it. According to the IRS, Caregivers, along with nannies and some other household workers, are a special class of workers with very specific tax regulations. I'm not going to go into the details here, but you are not legally an independent contractor although that's how it is usually handled by most caregivers/employers. It's quite expensive for the care receiver to pay these taxes as an employer (your mom). It's not legal and if your mom was audited there would be taxes due.
To me, this is a political issue about equity in the system. These are typically female positions and they are not getting tax contributions by employers to their social security and retirement. Most caregivers are paying for their own very expensive individual health insurance or don't have it at all themselves.
This money paid to you can be considered a gift rather than wages and you would not need to pay taxes. As far as consequences for gift tax on your mom's estate, my understanding from many talks with my mom's acct is, you can receive money over $13,000. BUT it's the amount OVER $13,000 for EACH person receiving a financial gift that will be pooled together and taxed in the estate upon death when the total reaches over $1,000,000. So if there's not going to be that amount pooled in the end, there won't be any gift tax owed upon death by the giver. The acct would file a gift tax return, documenting the gift amounts year by year. There is no tax to the receiver.
And yes, be sure to keep track of all medical expenses to take the tax deduction.
I strongly advise you to hire an acct and not trust what any of us non-professionals advise. It is well worth the money to have access to this person's expertise and counsel. My mom has dementia and I have developed quite a good relationship with my mom's acct which I value quite a bit during this difficult time.
Something to consider is medicaid planning. If the money paid to you as a caregiver (over and above expenses) is treated by you as income then it would also be free of the look-back rules for medicaid purposes. If it is considered a gift then it is not. It therefore may well be better for you as caregiver to consider it as income and pay the taxes yearly, especially if you are in a low or no income bracket. Failure to plan for medicaid may cost your family much more than the yearly income taxes. There is no "right' answer. Seek help from an eldercare attorney. Accountants do not know very much about medicaid planning.
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