Monday, February 19, 2007
More eldercare situations, and barter
As there are more only children or older adult children in small families in eldercare situations with elderly parents still living, sensitive tax and benefit issues may come up, and they may not have been spelled out explicit in tax law or administrative policy before.
It does appear from the literature (and IRS publications) that if one wants to claim an elderly parent as a dependent, there are stringent income limits on what the parent may earn above social security. This changes every year, so check with the regs or a tax advisor. If one lives with the parent rent free and claims the parent as a dependent, one has to add the fair market value of his housing to his "income."
That gets into the subject of barter, which the IRS discusses in detail under "other income" in its publications. The main situation that worries the IRS is that two parties that would normally exchange money (in a manner reportable in conventional channels) will barter to avoid taxes. The IRS gives as a specific example an artist living in an apartment building, giving the landlord a painting in exchange for free rent. The fair market value of the rent for the unit and of the painting must be reported. The IRS also has specific rules about barter clubs, gambling winnings, and prizes where goods are awarded rather than money (as on contests run by media outlets or television shows). If you win a trip by predicting whom Donald Trump will fire on The Apprentice, check with a tax advisor if you actually take the trip.
Do informal custodial care situations amount to barter when no dependency is claimed? The problem in practice that it is hard to "prove a negative" -- you cannot prove that something will not be a problem just because you cannot find it mentioned. But generally the IRS looks at arrangements between blood or lineal relatives as personal business, unless the individuals have intentionally set up business arrangements otherwise. For example, the IRS does not allow a property lived in free by a relative to have tax losses associated with expenses as it would on an investment property (with passive income rules) unless the relative pays fair market rent and the unit normally would be rented to the outside world. For example, look at this link.
Obviously, tax (and, for that matter, social security benefits policy) in sensitive personal situations like this can have serious social implications. It would be easy to imagine an intrusive tax policy (whether legislated by Congress or determined indirectly by IRS policies or tax courts) that penalizes eldercare situations, even when the general trend has been to encourage eldercare to be done at home to relieve the strain on nursing homes, assisted living, and other caregiving institutions, especially in a world where people can live longer. No wonder libertarians want to eliminate the income tax, or at least go to the postcard flat tax (as Forbes had proposed).
Anyone with knowledge or experience or specific references is invited to comment (moderated).
Picture: Raleigh Tavern, Williamsburg VA