Household Employment Tax Changes May Be Coming under Trump
Donald Trump’s incoming administration may decide to make some changes in tax policy for household employers and employees, including an idea that Trump credited to his daughter Ivanka to allow parents to deduct childcare expenses from their taxes.
Trump and his daughter unveiled the proposal on the campaign trail in September (see Ivanka Trump Takes Bow for Father’s Proposal for Childcare Tax Break). The proposal would enable working parents to deduct childcare expenses from their taxes for up to four children. Families who take the standard deduction, along with those who itemize deductions, could qualify. However, individual taxpayers who earn more than $250,000 a year or couples filing jointly who earn more than $500,000 a year wouldn’t qualify for the tax break as proposed. The maximum amount of the deduction would be capped at the average cost of childcare in each state.
However, whether or not the proposal actually ends up in Trump’s budget or tax reform plan next year is anybody’s guess. Tom Breedlove, director of Care.com HomePay, a service that specializes in handling the tax and HR obligations surrounding household payroll, sees some benefits to it. “I think that it would help families pay for care and that’s a good thing,” he said. “The tax breaks to help working families pay for care have been stagnant for way too long, and the real purchasing power of those tax breaks has really become almost de minimis at this point. We’re all in favor of anything we can do as a society to help working families. The prospects of that particular proposal that Donald Trump laid out will have to go through a scoring system with the [Congressional] Budget Office to make sure they can afford it. Assuming they can afford it, it would help families pretty significantly, but we’ll see what the appetite is when they score the cost.”
Even before the Trump administration takes office, though, there are some tax breaks families can take advantage of now if they hire household employees. For starters, they should be aware the Social Security taxable wage base will be increasing from $118,500 to $127,200 next year. Breedlove doesn’t anticipate the increase will have a big impact on most domestic workers because household employees typically earn less than $50,000 a year. But there are some tax breaks families should definitely know about for next tax season.
“Most families tend to overlook a lot of the tax breaks that are available to them regarding dependent care, whether it’s a child or an elder situation,” said Breedlove. “They can usually take advantage of one of the dependent care tax breaks. That can save them around $2,000 or sometimes even more. A lot of families will probably be looking at that next year.”
Expect changes in the Affordable Care Act too. Congress is likely to vote next year for at least the 60th time to repeal the Affordable Care Act next year, but this time Republicans may actually succeed since they won’t be facing a veto threat from President Obama. But until that happens, there are some tax breaks still available under Obamacare that might still be around under Trumpcare, or whatever replaces the ACA.
“For the caregivers themselves, there’s a federal subsidy or the premium assistance that the government offers for those who have purchased health insurance through the exchange,” said Breedlove. “Until we know otherwise, the Affordable Care Act will continue, and the federal subsidies that were promised workers that earn within 400 percent of the federal poverty level, which is about $47,000. So anyone who is making less than $47,000 is going to be entitled to a federal subsidy on health insurance, but they have to have documented wages in order to do that. I think we’ll see a lot of caregivers who are trying to capitalize on that particular tax advantage.”
He acknowledged that only part of the vast Affordable Care Act has a direct impact on household employment, most significantly the individual mandate to have health insurance. “That’s really on the worker,” said Breedlove. “Some of the tax breaks that employers get if they do offer health insurance can affect families, but I think that in both of those scenarios, there is still going to be a strong desire for people to have health insurance, and there will probably be strong incentives for employers to offer health insurance. I don’t really anticipate it having a huge impact on household employment, but we’ll see.”
Despite all the unknowns at the federal level, there are some changes that are definitely on the horizon in many states and cities in areas such as the minimum wage and paid family leave.
“When we look at the changes that we know are coming, they tend to fall largely in the payroll and labor law kind of category,” said Breedlove. “There are a lot of minimum wage changes and then also paid sick leave. Many municipalities and states are beginning to follow the concept that we don’t want sick workers to go to work and infect other people, so they’re asking employers to accrue paid sick leave for their employees and make sure they have some paid days off so they don’t feel forced to go to work. That’s sweeping the country. There are so many municipalities and states that are requiring employers to do that.”
Another area that Breedlove anticipates will affect tax preparers is the Social Security Administration’s changed filing deadline for copy A of the W-2 and the W-3. “Those are now going to be due at the end of January, so tax preparers need to know that’s been moved up,” he said. “Coinciding with that, a lot of states—the ones that have annual reconciliations where wages have to be recapped at the end of the year—are now changing their deadline to coincide with the Social Security Administration’s deadlines, so at the end of January we’ll have more to-do’s than normal.”
On top of that, seven states have passed Domestic Workers’ Bill of Rights legislation, most recently this past May in Illinois. The other six states are California, Connecticut, Hawaii, Massachusetts and New York. “These are state statutes that provide protections for domestic workers, and there are quite a few protections at the federal level under the Fair Labor Standards Act,” said Breedlove. “But many states didn’t have anything on the books to protect domestic workers. Now domestic workers [in those seven states] have more rights and more specific protections and remedies if they are wronged, so they have easier ways to dispute wages or to try to collect unpaid wages from their employers on things like overtime and paid sick leave.”
Families who hire employees to take care of their aged parents and grandparents can also qualify for tax breaks. “In the senior care world many people are not aware that nonmedical senior care can be part of the medical expense deduction if it’s prescribed by a doctor,” said Breedlove. “There are lots of Alzheimer’s and dementia patients who have been told that someone needs to be there for fellowship or protection to care for that patient. Even though it’s not a medical caregiver, it can be considered medical care and therefore they can take advantage of the medical expense tax deduction. With our aging population that’s a really important point.”
Household employers also should be aware of tax breaks for some of the benefits they might provide to caregivers.
“Most families overlook a number of forms of nontaxable compensation that prevent both the family and the caregiver from having to pay taxes on a certain portion of the wages,” said Breedlove. “Those get overlooked so often that I always want to make sure that people are aware of that. If we can sit down with the family when they’re in the hiring process, we can help them take advantage of things like employer-paid health insurance, employer-paid tuition, cell phone usage, parking and public transportation. Things like that are considered nontaxable forms of compensation.”