Timely tax-saving tips and strategies

Tax tip #1

by Gary Krupa, CPA

Deducting medical expenses and real estate taxes paid by someone else

If you read the IRS instructions for filing Schedule A form 1040, you’ll discover that you can only claim a deduction for medical expenses and real estate taxes you paid. In IRS publication 502, it says “You cannot include medical expenses that were paid by insurance companies or other sources.”

However, in a 2010 Tax Court decision, a daughter was allowed to deduct medical expenses and real estate taxes that her mother paid on her behalf. The daughter wasn’t eligible to be claimed as a dependent by her mother. The Tax Court ruled that the payments were to be considered as a gift made directly to the daughter, and then paid by the daughter to the medical service providers and County Treasurer. The facts of the case supported this treatment. For the complete article, including mention of the gift tax exemption and the Tax Court memorandum, visit this web page: http://www.smartmoney.com/taxes/tax-policy/free-lunch-deducting-expenses-you-never-paid-1316547708569/?link=SM_clm_sum#article_tab_article

Thus if someone is willing to pay your expenses in this manner, they're not just helping you meet your obligations. They're helping you save money by causing you to pay less in taxes, too.

Should you then decide to pay that person back, you should call it a gift, just because their payment was treated as a gift – it’s quite okay to exchange gifts. If you pay them their share of the tax savings too, that can be considered non-deductible personal interest. I recommend that if you pay them back, that you pay their medical expenses and or real estate taxes (if they have them). That way, they avoid having to apply such payments to the annual gift tax exclusion of $13,000, so that the exclusion can be available for other gifts.