Deducting medical expenses and real estate taxes paid by someone else

By Gary Krupa, CPA

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), so that they’re able to deduct the payments and reduce their tax just as you did when they paid your expenses.

Be sure that transactions like these take place before the end of this year, so that you and your relative or friend can realize tax savings for this year.

Gary Krupa is a CPA in Arizona, with more than twenty-five years experience providing accounting, tax, audit and computer services to organizations of all sizes. He’s especially attentive to the needs of his clients. He moved to Rimrock, Arizona in late May 2008. He has offices in Rimrock and Peoria, AZ. His e-mail address is gkcpa@q.com. His website URL is http://garykrupacpa.com.