Gift and Estate Taxes For Caregivers
When it is time for you or your senior to think about finding care, it’s often a better option financially to have a family member or close friend become a caregiver. While this can decrease the hassle of moving into an assisted living facility, it will also bring up a variety of tax issues that you and your loved one must be aware of. One such tax issue that may arise relates to gifts and estate. For this reason, it is very important to keep records of all gift and estate transactions for tax purposes.
According to the IRS, family caregivers, nannies, and some other household workers are a special class of workers with specific tax regulations. In general, payments to caregivers may help reduce estate tax liability, but experts caution that it is essential to report transactions properly. Whether you’re a caregiver, legal guardian, power of attorney, or even all three, these taxes are important and sometimes complicated.
Below, we’ve listed important information regarding gift and estate taxes for caregivers. While our intent is to help caregivers better understand gift and estate taxes, each situation is unique, so we recommend that you speak to an attorney and/or accountant regarding your personal situation and financial obligations. Since we are not a financial institution or law office, we still recommend that you meet with a financial advisor or other licensed professional to ensure that your finances are being handled properly.
What is Considered a Gift?
A gift is considered any transfer of personal property or money that holds value. Stocks, money, property, and jewelry are just a few things that the government considers gifts during tax season. However, many people do not realize that the following can also be considered gifts:
- A sale of property where the money received is less than the value of the property.
- Making an interest-free or below market interest rate loan.
- Forgiving a debt.
- Some kinds of property settlements in divorce proceedings.
- Surrendering a portion of an annuity to create a survivor annuity. A survivor annuity is an insurance product that makes regular monetary payments to the surviving holder of a policy, once the other holder has passed.
When a family member takes over the caregiver role, the senior may decide to compensate them financially. While many would believe that this can be paid under the table, not filing this gift on your tax return can lead to serious consequences. If a donor gives more than $14,000 dollars in compensation over the course of a year, then they must file this as a gift during tax season.
Lifetime Gift Tax Exemption
The lifetime gift tax exemption is the total amount that can be given away by an individual over his or her entire lifetime to any number of people that will be free from gift taxes, but the amount gifted will, in turn, reduce the amount that can be given away by the individual at death free from U.S. federal estate taxes.
At the time this article was written, the total amount that a person can give away in their lifetime is about $5.3 million dollars. So, if a person gives away $2.3 million dollars during their lifetime, then the individual’s federal estate tax can only be as much as $3 million dollars. This is why gift and estate taxes should be carefully monitored as a caregiver.
Gifts of Present and Future Interest
When reporting gifts on your taxes as a caregiver, there are two different kinds of gifts to be aware of, gifts of present and gifts of future.
Gifts of Present
These include gifts that will have a direct impact on your financial situation upon receiving them. This mostly covers monetary donations, like paying for a caregiving service. Gifts of the present can be covered by the gift tax exemption.
Gifts of the Future
Gifts of the future, on the other hand, cannot be exempt. These include gifts that may not provide immediate benefit, but will later down the line. These include stocks and rights to a piece of property that will be passed down through the estate.
What are Estate Taxes?
Estate taxes are when a person passes away and their property and assets are passed down via a will or a court-appointed administrator. There are a variety of things that cannot be taxed, and these include, but may not be limited to:
- Money in checking and savings accounts, CDs, and money markets
- Investment accounts
- Stocks and bonds in certificate form
- Personal property (e.g. jewelry, artwork, clothing, books, furniture, etc.)
- Automobiles, airplanes, and boats
- U.S. savings bonds
- Real estate
- Closely held business interests (e.g. LLCs, sole proprietorships, partnerships, stock in corporations)
- Retirement accounts (e.g. annuities; Simple, SEP, Roth and Traditional IRAs; 401(k)s; 403(b)s)
- Life insurance (If the decedent owns their own policy, then all of the proceeds are included. If the decedent owns a policy on someone else's life, only the cash value of the policy is included.)
- Life insurance owned by the deceased and transferred into an Irrevocable Life Insurance Trust within three years of their death.
- Gifts made that exceed the annual gift tax exclusion amount for that year ($14,000 in 2015)
- Money owed to the deceased (e.g. wages, bonuses and commissions; mortgages and personal loans held by the deceased)
All other finances will be taxable.
As a general rule, most of the time spouses or close relatives will inherit a great amount of tax. However, unless the deceased had outstanding debts with little assets, most family members will not be crippled by estate taxes.
In the end, it’s important that you and your loved ones make sure that you’re aware of gift and estate taxes for caregivers. It could save a lot of time, and more importantly money, as your loved one ages.