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Tax Implications of a Medicaid Personal Service Contract

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personal services contract income is taxable
The money you received from that personal services contract you signed has to be reported to the IRS.

Personal services contracts are very popular in long-term care planning – especially when Medicaid benefits are sought. But they may not be the best solution.

Long-term care in a nursing home (also called a rehabilitation center) is expensive. Many people who are receiving or will be receiving long-term care have little in savings and face impending impoverishment. Medicaid rules allow certain planning measures that may preserve some of the applicant’s assets for his or her family.

One of these measures is known as a personal service or lifetime care contract. This legal contract specifies the compensation a family member will receive in return for providing lifetime personal care and oversight of professional care for the nursing home resident. The Medicaid rules and the family situation will dictate how much compensation can be paid.

In most states, the caretaker is paid in installments as the care is provided. But, in Florida, the caretaker can receive the compensation as a lump sum payment. The caretaker receives the compensation up front, but is legally obligated to provide care for as long as the nursing home resident is alive.

This lump sum payment is considered compensation by the IRS and is taxable income to the caretaker when received.

I’m going to repeat that because it’s so important:

This lump sum payment is considered compensation by the IRS and is taxable income to the caretaker when received.

The Internal Revenue Code § 61 defines gross income as “…all income from whatever source derived, including (but not limited to) the following items: (1) Compensation for services, including fees, commissions, fringe benefits, and similar items…”

Some people think that just because they don’t receive a 1099 or W-2 for certain income, they don’t have to report it on their tax return. Wrong! Just because the IRS may not be notified of the payment doesn’t mean it doesn’t have to be reported. All income – even illegal income – must be reported or you’re committing tax fraud.

If you’ll be receiving compensation due to a personal service contract, be sure to talk to your tax professional before signing the contract because the tax consequences of receiving a lump sum payment may be more detrimental to you than it is beneficial to the potential Medicaid applicant. An Elder Law attorney may be able to provide your family with other alternatives.

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