Paying the medical or nursing home expenses of others: easing the financial burden by maximizing the deductions.

• Author: Sprohge, Hans

The financial burden on taxpayers who pay the medical or nursing home expenses incurred by others may be considerably reduced by careful planning. Some planning parameters are (1) the dependency status of the person who incurred the medical or nursing home expenses; (2) the deductibility of the medical care and nursing home expenses; (3) the timing of the payments; (4) the reimbursement of payments; (5) the taxpayer's adjusted gross income (AGI); and (6) the taxpayer's tax rate. As this article will illustrate, within these parameters, taxpayers may be able to structure their affairs to maximize the tax benefit of deducting the medical and nursing home expenses incurred by others.

Dependency Status

For medical care and nursing home expenses to be deductible, the person for whom the expenses are paid must be an individual taxpayer's dependent either at the time the medical care or nursing home services are rendered or at the time the expenses are paid.(1) Under Sec. 152(a), a "dependent" is any person who for the calendar year in which the taxpayer's tax year begins meets the relationship or member of household, support and citizenship tests.

A common mistake is to assume that the medical expense deduction is lost if the dependency exemption cannot be taken. The Sec. 151 dependency exemption is subject to a gross income test. For purposes of the dependency exemption, an individual is not treated as a dependent if he has gross income equal to (or greater than) the exemption amount ($2,350 for 1993) for the year. However, Sec. 152 does not require a gross income test in order for an individual to be a dependent. Rather, for purposes of determining the deductibility of medical care and nursing home expenses, the definition of "dependent" in Sec. 152 controls. Therefore, an individual may be a dependent for purposes of the deductibility of medical care or nursing home expenses but not for exemption purposes.(2)

* Relationship test

An individual must bear a certain relationship to the taxpayer, by being the taxpayer's (1) child or the child's descendant;(3) (2) stepchild; (3) brother or sister; (4) stepbrother or stepsister; (5) parent, grandparent, great-grandparent, etc.; (6) stepfather or stepmother; (7) aunt, uncle, niece or nephew; (8) son-in-law or daughter-in-law; (9) father-in-law or mother-in-law; or (10) brother-in-law or sister-in-law.(4) (A foster parent does not meet the relationship test, however.) Any of these relationships that are established by marriage are not terminated by death or divorce. For example, a widower who continues to support his father-inlaw after the death of his wife may still claim the father-in-law as a dependent.(5)

If a joint return is filed, the required relationship needs to exist with only one of the spouses, regardless of which spouse actually furnishes the support. For example, a husband and wife filing a joint return may claim the wife's aunt as a dependent even though the husband is the one who furnishes the chief support. If a separate return is filed, the required relationship needs to exist with the taxpayer. An individual related to the spouse but not to the taxpayer cannot qualify as the taxpayer's dependent except as a member of the taxpayer's household. For example, a husband filing a separate return could not claim his wife's aunt unless she met the member of household test.

* Member of household test

An individual must have as his principal place of abode the taxpayer's home and be a member of the taxpayer's household for the entire tax year of the taxpayer,(6) but is not required to be related to the taxpayer.(7) The taxpayer must maintain the household and both the taxpayer and the dependent must occupy it.(8) The taxpayer maintains the household if he pays more than half the household expenses, even if the dependent owns the home.(9)

The taxpayer and the dependent are treated as occupying the household for the entire year notwithstanding temporary absence due to special circumstances, e.g., indefinite confinement in a nursing home for constant medical care.(10) A dependent who dies before the end of the taxpayer's tax year meets the occupancy requirement, provided the dependent lived in the taxpayer's household during the entire part of the year before death.(11)

An individual does not meet the member of household test if the relationship between such individual and the taxpayer is in violation of local law.

* Support test

An individual must receive over half of his support from the taxpayer.(12) The support test is strictly one of cost based on the amount of support for the year, not on when it is provided.(13) For example, if a person supports himself for three-quarters of the year and spends $10,000 and the taxpayer supports him for the remaining quarter of the year and spends $10,001, then the taxpayer meets the support requirement. On the other hand, if one son supports his mother for seven months he still does not meet the support test if another son spends more than he did in the remaining five months.(14)

The term "support" includes payments for, and the fair market value of, property used to provide food, lodging, clothing, education, medical and dental care, recreation, transportation and similar necessities.(15)

When two or more taxpayers contribute to the support of an individual, a taxpayer may be treated as contributing over half of the support of the individual for the calendar year if (1) no one person contributes over half of the individual's support; (2) each member of the group that collectively contributes more than half of the support of the individual would be entitled to claim the individual as a dependent but for the fact that he did not contribute more than one-half of such support; (3) the member of the group claiming the individual as a dependent contributes more than 10% of the individual's support; and (4) each other person in the group who contributes more than 10% of such support files a written declaration that he will not claim the individual as a dependent for any tax year beginning in such year.(16)

Example 1: During the current tax year, brothers A, B, C and D contribute the entire support of their mother in the following percentages: A, 30%; B, 20%; C, 29%; and D, 21%. Any one of the brothers would be entitled to...