Does My VA Caregiver Have to Pay Taxes if the Funds Mostly Pay for My Expenses?

A new program under the Caregivers and Veterans Omnibus Health Services Act of 2010 offers a stipend payment to the family caregiver for veterans injured after September 11, 2001. A previous program for veterans or their widows, called the Veterans Aid and Attendance Pension Benefit, provided an additional amount up to $1,843 per month to pay family members for at-home care. A required contractual agreement should be in place before applicants can apply for the funds.

If you listed your family caregiver as an independent contractor, the Internal Revenue Service, or IRS, does not consider you an employer and you do not have to pay the employer half of Social Security. If you listed the caregiver as an employee, however, you must pay half the Social Security tax on the wages paid to the caregiver.

The government pays the stipend pay under the Caregivers and Veterans Omnibus Health Services Act and thereby acts as the employer. The government provides access to health insurance to the caregiver, mental health services and counseling, respite care and comprehensive caregiver training.

If the caregiver is self-employed, she can deduct any medical expenses directly from her Schedule C income before paying taxes. These expenses may include items necessary for your care, driving expenses and items purchased to make her job easier or more efficient.

If the caregiver is an employee of either you or the government, the funds used to purchase items for your benefit are still deductible but only to a certain extent. He can deduct them from itemized deductions as business expenses under miscellaneous items. He then reduces the deduction by 2 percent of his adjusted gross income.

If the caregiver deducts the expenses for items she used for your care, it results in a lower taxable income for her. Therefore, she's not paying tax on the money she received for your care.