An ALS diagnosis brings lots of changes, including financial ones. Medical bills increase, income decreases, and there are questions about everything from insurance coverage to estate planning.
One thing that does not change is the government requirement to pay taxes. As long as you have an income, you have to file an income tax return.
Below are some tax considerations that people with ALS should keep in mind, along with ways to potentially decrease your tax burden.
All medical costs can be deducted on your federal tax returns, as long as those expenses exceed 10 percent of your adjusted gross income.
Medical expenses can include almost anything related to your medical care, including transportation costs to and from appointments, prescription drug costs, buying or renting medical equipment, nontraditional medical care, and mental health expenses. Remember that the medical expenses don’t have to be related to ALS, so expenses like prescription eyeglasses or dental cleanings are also deductible.
Costs that are not deductible include over-the-counter medications, vitamins, health foods, and cosmetic medical procedures. Generally speaking, if it wouldn’t be covered by health insurance, it won’t be considered deductible by the IRS.
Note that the deductions only cover your unreimbursed out-of-pocket expenses. You can’t deduct the portion of your medical bill that is paid for by your insurance policy, for instance. And it only includes payments, not bills; if you have unpaid bills, you can’t deduct them until they are paid. For example, if you receive a bill in December this year but don’t pay it until January, then it can’t be deducted from this year’s taxes. Instead, it will go on the next year’s tax return.
Employment Taxes for In-Home Caregivers
If you hire someone to provide in-home care—whether it be a private nurse, a housekeeper, or any other kind of paid caregiver—you may be responsible for their payroll taxes.
Many in-home caregivers are hired through agencies. If you go through an agency, the caregiver is typically considered an employee of the agency, and the agency is responsible for all payroll taxes and IRS forms. All you have to do is pay the agency, and they will take care of those details.
If you hire a caregiver directly, without going through an agency, your tax responsibility depends on whether they are considered an independent contractor or a household employee.
If the caregiver is an independent contractor, you do not have to withhold any taxes from their pay. Someone is considered an independent contractor if they are able to decide when and where the work is performed, if they provide their own equipment, or if they have the flexibility to outsource work to another caregiver. Though you don’t have to cover an independent contractor’s payroll taxes, you do have to file a 1099 tax form for them if you pay them more than $600 over the course of the year. If it is less than $600, you do not have to file anything.
If the in-home caregiver is not an independent contractor, then they are considered to be a household employee. Since they’re your employee, you are responsible for withholding payroll taxes from their paycheck, and must issue the employee a W-2 at the end of the year.
Other Tax Considerations
A few other things to keep in mind when navigating your tax responsibilities:
If you do not earn any taxable income throughout the entire year, you most likely won’t need to file a tax return (and definitely will not have to pay any income taxes).
If, due to ALS, paying your income taxes would present a financial hardship, you can apply to be considered “currently not collectible” by the IRS. This doesn’t eliminate your tax debt, but it means the IRS won’t penalize you for not paying your taxes.
If you receive an accelerated benefits rider, which is an early payout from a life insurance policy, you should check with a tax advisor to see if the payout is considered taxable income. Usually, such benefits are not taxable, but there are exceptions to the rule.
When someone passes away, survivors must still file a tax return on their behalf for any income earned before their death.
There may be state and federal taxes on any inheritance left to survivors.
You can talk with a tax advisor or an estate planning attorney to get professional advice on what your tax burdens might be, and potentially reduce the amount of taxes that have to be paid.