Personal Care Agreement for Mom who lives wth Daughter

[KC-CPA]

I have a client whose Mother moved in with them in June 2014 and they drafted a Legal Personal Care Contract document -- they did this for reasons to provide support to siblings of the arrangement and the financial considerations being given.

There is a compensation section within the document that states the Daughter and Son-In Law will receive $600 per month, $400 for rent and $200 for care, the agreement is for over the lifetime of the recipient, the contract also states that the Mother will pay for personal shopping items. The compensation section states an average hourly rate for care would be $10 per hour and require 40 or less hours per week so the agreement is $200 per month. It really is a daughter taking care of her Mother because her Mother's health does not allow her to live by herself and the mother's income is not enough to live in a personal assistant home.

The Mother-in-law receives $1800 per month from social security and benefits.

Ideally I would have liked to just treated it as daughter taking care of Mom, living with her, and claimed the Mom on the daughter and her husbands return, however, with the official legal document stating rent and compensation, I am not sure how that would go with the IRS since it is spelled out. It really is a daughter taking care of her Mother because her Mother's health does not allow her to live by herself and the mother's income is not enough to live in a personal assistant home.

Based on this information and Personal care contract should rent and compensation be recorded ($400 a for a room would be close to FMV but not for Room and Care)? Should the Mother be claimed as a dependent on their return.

I believe no rent should be recorded as I would argue that there is no intent for profit and to not claim her as a dependent primarily because she has sufficient income and the contract states she will pay for her own living expenses.

[ATSMAN]

If the mother's income is below $3,950 (not counting soc. sec), then yes she qualifies to be her daughter's dependent since she is living with her.

Since there is no profit motive and this is her mother living in a single family home I would call the rent a wash against expenses. No different than your kids paying something to live in your home!

The other compensation is an issue since it specifically states the rate of pay etc. Is there a way it could be modified to be a gift? I am not an attorney but if that was my mother I would look into that angle.

[KC-CPA]

Thank You for your reply. Funny you should ask about making it a gift... the client would spin around in his chair if I suggested that the whole purpose of the contract was to substantiate with siblings that Mom was not giving/gifting the money to them cause the siblings would thank that was unfair... however, I don't see Mom living with the siblings either... I advised not using the words compensation and specifics around that but the attorney specified otherwise (he won't be preparing their return)

I wonder if I could just include it as other income and not W-2 the income, I really don't think it is household employee income since its not someone coming to the Mom's house and its not definitive on hours, its just a straight up $200 per month.

[Roland Slugg]

This is the second thread on this or a similar topic in recent weeks to which ATSMAN has replied that amounts received as rent from a relative are not taxable because there is no intent to make a profit. In the other thread he even suggested that "If IRS takes that strict position with family members living with another family member then America is in deep trouble." Deep trouble?

It is unfortunate that the lawyer in this case overruled everyone and insisted on calling the payment rent (for $400) and compensation for personal care services (for $200). But he did, and everyone agreed, and now there is a written document memorializing that agreement. The family dynamics must be brutal if everyone thought such an agreement was really necessary.

When someone pays another person money for the right and privilege of occupying property, that payment is rent. It is taxable. There is no provision in the tax law to ignore such rent just because it happens to come from a relative ... even if there is no intent to make a profit. The same is true of the $200 to be paid for personal care. It is taxable income to the daughter.

If these were my clients, I would explain to them the tax implications of that agreement and recommend that it be rescinded. A monthly or annual gift to the daughter and son-in-law would be far more preferable, and the mother's other children would just have to get used to it.

Finally, I would like to comment on the question of claiming the mother as a dependent on the clients' tax return. In another reply above it was stated that the mother does qualify as a dependent if the mother's income is below $3,950, not counting social security. That's not exactly how that particular qualifying condition works. A qualifying relative's gross income is what is counted, and the term "gross income" does include the taxable portion of social security benefits. In the instant case if the mother's social security is all the income she has, then her gross income is, indeed, zero. The point here is that social security isn't automatically ignored in determining the person's gross income.

Even if the gross income test is met, however, there is still the question, "Did you furnish over half the relative's total support?" In making this determination the mother's social security benefits are taken into account. It was stated that the mother's social security is $1,800 per month. That alone amounts to $21,600 annually, a sum that the daughter and son-in-law may have difficulty equaling or exceeding when measuring their support in any year, and especially in 2014 since she didn't move in with them until June.

[ATSMAN]

"If IRS takes that strict position with family members living with another family member then America is in deep trouble." Deep trouble?

I still maintain that position. Thousands if not millions of children living in their parent's home paying some sort of "rent" to stay there!

You really think IRS has the budget and manpower to audit these arrangements with a strict interpretation of the law as you stated? I know you are correct dotting the i and crossing the t but from a practical viewpoint it probably will not work IMHO!