Money is money, right? Or more specifically, if you’re spending money, it may appear that it’s always coming out of your own pocket in the same way. This is true in most cases, although there are different ways to spend money.
One of the obvious divergences in types of money and spending is pretax versus after-tax income, which most people are familiar with due to the common use of Health Savings Accounts, or HSAs. But just as with an HSA, one must realize that the benefits of spending pretax dollars are usually seen later, after the tax return is filed and the refund is received, up to a year after the original bill is paid. Donating to charities is just one way people can better utilize pretax income, especially if the person in question is already spending large amounts on assisted living costs for a loved one.
When your parent or loved one can’t afford their own care
Paying out-of-pocket for healthcare costs, particularly expenses for a loved one who doesn’t have their own income, can become extremely difficult. We’ve established in previous posts that the financial burden on caregivers and the home-bound are astronomical and growing, but even if costs of daily living aren’t covered by insurance or aid programs, is it possible to save money while you pay these expenses yourself?
Current legislation doesn’t immediately allow families a tax benefit from paying directly for a loved one’s care. Individuals may have access to certain tax benefits for paying for their own care, but these remain limited. The most common situation occurs when an individual is not capable of drawing an income outside of entitlements and the financial burden of their care (which often costs substantially more than a social security check can cover) falls to close family members such as a sibling or often an adult child.
How then, are family members supposed to cover the costs? Even if one could afford to pay these substantial expenses out-of-pocket each month, why wouldn’t one take advantage of the opportunity to pay these bills with pretax dollars? In truth, it’s because most people in this situation may not be aware of the potential opportunity for tax benefits. This is where a non-profit public charity like the Live Care Foundation comes in.
Making charitable donations to pay bills with pretax money
When you donate to a charity or non-profit organization, you may be able to then claim that donated money as an itemized deduction when you or your accountant files your taxes each year. Itemized deductions help to offset your annual tax burden or, better yet, generate tax refunds. Depending on your income tax bracket, credits or refunds can often be substantial. By donating to a charity like Live Care, you allow the charity to act as a third party that pays your loved one's bills with your donated funds, all the while giving you a tax break for money you were going to spend anyway. Here’s a specific example of how it might work, with the caveat that the following should not be taken as applicable tax advice, but is purely to illustrate the process. In all cases, please consult with your tax advisor. Live Care Foundation does not give tax advice.
An example of using pretax dollars for Grandma’s care
A typical expense for an in-home care service provider is between $25-$30 per hour. The receiver of that care requires anywhere between a handful of hours to 24/7 care. Some even live in memory care facilities that cost much more. So if the low-end of care costs are $25/hr, a single day of care involves 4 hours, say morning and evening assistance, then the daily cost is $100. The monthly cost is $3,000 for just a few hours of care each day. Someone with a $2,500 social security check is ill-equipped to deal with these type of expense.
Let’s say it costs John $1,500 (at just 2 hours per day) for a month to cover for his mother’s care. John pays this expense out-of-pocket from his previously taxed income. If John’s tax bracket is 25 percent, that means John had to earn $2,000 to yield the $1,500 he needs after tax to pay his mom's bill. The true cost to John isn’t just the $1,500 bill; it's the $2,000 of income he had to forfeit to get the bill covered. John now realizes he had to earn that much gross pay in order to net $1,500 to pay the bill. He now wants to know if there is a way to reduce such a financial burden.
Luckily, John can change a $1,500 post-tax expense to a pretax donation that Live Care Foundation will use to pay his mom's bill. John donates $18,000 over the course of a year and itemizes his deductions at tax time. As his tax bracket is 25%, he will earn a tax credit or refund of $4,500. That's a big benefit that will help offset the cost of his mom's care.
Live Care Foundation directly pays both in-home and facility-based care providers using your donations. This allows you to receive potential tax benefits from money you would spend anyway. It's important to distinguish between an individual needing care and a family member paying for that care. The IRS generally does not allow a donor to claim a tax deduction if the donor receives a benefit from making that donation. In the case of John's mom, if she were to use her own money to donate to the charity, she would not be entitled to a tax deduction because she's the individual receiving the care that the donation is funding. But if John makes the donation, he's not receiving the services himself; therefore, he's entitled to claim the deduction.
Reap the benefits of utilizing a charity to pay the cost of care
The truth is, those who donate to nonprofit charities qualify for tax breaks, tax credits, or refunds. Either way, families who have these assisted-living expenses will be better off by utilizing a nonprofit like Live Care to pay such expenses. If you’re already spending the money each month, consider doing it through a charitable organization dedicated to helping ease the burden of care on families. Tax time comes around every year whether we want it to or not, so find out how to make payments through Live Care Foundation to take advantage of tax benefits. Contact us today to learn more.