Family and Household Transactions (Portfolio 513)

Tax Management Portfolio, Family and Household Transactions, No. 513, brings together analyses of the income tax provisions that affect transactions that are generated by maintaining a family and operating a household. To view this Portfolio, visit Bloomberg Tax for a free trial.

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Description

Tax Management Portfolio, Family and Household Transactions, No. 513, brings together analyses of the income tax provisions that affect transactions that are generated by maintaining a family and operating a household. The portfolio separates the analyses into three categories. The portfolio also presents a history of the provisions as they have been added, expanded, and modified.

First, the portfolio discusses the general limitation on the deduction of personal, living, and family expenses. It describes the scope of that limitation and the consequence of classifying an expense as a personal, living, or family expense.

Second, the portfolio discusses exceptions that provide gross income exclusions or allow deductions or credits with respect to family expenses. This brings together in one place analyses of the medical expense deduction, the deduction for personal and dependency exemptions, the child tax credit, the household and dependent care credit, the credit for the elderly and disabled, the adoption assistance credit and the adoption assistance exclusion, and the dependent care assistance credit.

Third, the portfolio discusses exceptions that provide gross income exclusions or allow credits with respect to household expenses. This brings together in one place analyses of the home mortgage interest credit, the exclusion for reimbursements of certain living expenses, the foster care payment exclusion, exclusions for housing relief, and disaster relief payment exclusions.

The portfolio does not discuss tax breaks affecting personal and household transactions that are discussed in other portfolios. These include: the tax treatment of interest and taxes paid in connection with home ownership and the exclusion of gain on the sale of a principal residence, discussed in 594 T.M., Tax Implications of Home Ownership; the treatment of vacation homes and the use of a portion of a principal residence for business purposes, discussed in 547, Home Office, Vacation Home, and Home Rental Deductions; credits with respect to energy conservation, discussed in 512 T.M., Tax Incentives for Production and Conservation of Energy and Natural Resources; alimony payments, discussed in 515 T.M., Divorce and Separation; and tax breaks with respect to education, discussed in 517 T.M., Scholarships and Educational Expenses.

This Portfolio may be cited as Maule, 513 T.M., Family and Household Transactions

Authors

James Edward Maule, Esq.

James Edward Maule, B.S., University of Pennsylvania (1973); J.D., Villanova University (1976); LL.M. (Taxation), George Washington University (1979); lecturer, Villanova University Graduate Tax Program and Tax Forum CLE Programs; lecturer, Philadelphia Bar Association Tax Section; member, U.S. Income Advisory Board, Tax Management Inc.; former attorney-advisor, United States Tax Court, Judge Herbert L. Chabot; former attorney-advisor, Chief Counsel to the Internal Revenue Service; former Editorial Advisory Board member and Columnist, Journal of Limited Liability Companies; former lecturer, ALI-ABA; former lecturer, Tax Management, Inc. & Continuing Legal Education Satellite Network; former lecturer, Pennsylvania Bar Institute; former lecturer, Georgetown University Law Center Institute on State and Local Taxation; former lecturer, The Dickinson School of Law CLE Programs; member, American Bar Association, Section of Taxation, Committee on S Corporations (Consultant and former Chair, Subcommittee on Subchapter S and State Law; former Chair, Subcommittee on Comparison of Partnerships and S Corporations); member, American Bar Association, Section of Taxation, Committee on Teaching Taxation (Chair, Subcommittee on Manuscripts and Unpublished Teaching Materials; member, Subcommittee on Important Developments); member, American Bar Association, Section of Taxation, Tax Practice Management Committee; member, American Bar Association, Section of Taxation, Formation of Tax Policy Committee; member, American Bar Association, Section of Taxation, Committee on Tax Structure and Simplification; former Chair, American Bar Association, Section of Taxation, Phaseout Tax Elimination Project; former member, American Bar Association, Section of Taxation, Task Force on Pass-Through Entities; former member, American Bar Association, Section of Taxation, Task Force on Legislative Recommendation No. 86-1; former member, Philadelphia Bar Association Tax Section; author and owner, TaxJEM Inc., publisher of computer assisted legal instruction programs; owner, JEMBook Publishing Company, publisher of law and genealogy books; author of numerous books, monographs, and book chapters; contributor to various tax periodicals.

Table of Contents

Detailed Analysis
I. Introduction
A. Overview
B. Historical Background
1. In General
2. Pre-Codification Era
3. Internal Revenue Code of 1939
4. Internal Revenue Code of 1954
5. Internal Revenue Code of 1986
C. Same-Sex Spouses
II. Personal, Living, and Family Expenses
A. In General
B. Personal Expenses
1. Self-Improvement Expenses
a. Appearance
b. Physical Health
c. Prestige and Reputation
2. Entertainment and Meal Expenses
3. Subscription Costs
4. Insurance Costs
5. Hobby Expenses
6. Travel Away from Home
7. Attorney's Fees and Related Expenses
a. In General
b. Expenses Related to Family Matters
(1) Children
(2) Incompetency and Related Proceedings
(3) Family Property Management
(4) Marital Situations
(a) Marriage Contracts
(b) Divorce or Separation
(c) Child Support and Custody
C. Living Expenses
1. Household Expenses
a. In General
b. Multiple-Use Property
c. Increased Living Expenses
2. Groceries and Clothing
3. Equipment Purchased by Members of the Armed Forces
4. Telephone Expenses
a. In General
b. Local Telephone Service
c. Optional Services
5. Commuting and Parking Costs
6. Vehicle Expenses
7. Losses on the Acquisition and Disposition of Residences
D. Family Expenses
1. Payments to Family Members
2. Education Expenses
3. Child Care Expenses
4. Credit Card Expenses
III. Exceptions Related to Family Expenses
A. Medical Expenses
1. In General
2. Scope of Deduction
a. Taxpayers Entitled to Deduction
b. Persons Whose Medical Expenses Qualify
(1) In General
(2) Spouses
(3) Dependents
3. Limitations on Deduction
a. Percentage Limitations
(1) In General
(2) Adjusted Gross Income Recomputations
b. Coordination With Credits
c. No Maximum Limitation
d. Reimbursements
(1) In General
(2) Dependent's Resources
(3) Corporations and Shareholders
(4) Awards to Crime and Disaster Victims
(5) Disability Benefit Payments
(6) Personal Injury Awards for Future Medical Expenses
(7) Personal Injury Awards for Past Medical Expenses
(8) Payments Received Under Employer Accident and Health Plans
(9) Payments Received Under Long-Term Care Insurance Contracts
4. Definition of Medical Care
a. In General
b. Medicine, Drugs, and Supplies
(1) Prescription Items
(2) Nonprescription Items
c. Special Diets
(1) In General
(2) Vitamins
(3) Allergy Diets and Organic Foods
(4) Salt-Free Diets
d. Insurance
(1) In General
(2) Medical Care Insurance
(3) Qualified Long-Term Care Insurance Contract
(4) Medical Care Coverage Under Combined Policies
(5) Medicare and Social Security Payments
(6) Private Death and Disability Policies
(7) State Disability Funds
e. Capital Expenditures
(1) In General
(2) Capital Expenditures Not Related to Permanent Improvement of Property
(a) In General
(b) Assistance for Seeing and Hearing
(c) Vehicles and Mobility Devices
(d) Equipment Affecting Health Environment
(e) Medical Equipment
(f) Other Equipment Used for Medical Purposes
(g) Other Activities
(h) Miscellaneous Items
(3) Capital Expenditures Related to Permanent Improvement of Property
(a) In General
(b) Home Elevators
(c) Swimming Pools and Hot Tubs
(d) Heating, Plumbing, and Central Air-Conditioning
(e) Attached Garage
(f) Lead Removal
(g) Accommodations to Principal Residence of Disabled Person
(h) Fallout Shelters
(i) Home Office
(4) Operation and Maintenance of Capital Assets
f. Funeral and Burial Expenses
g. Child Care Expenses
(1) Day Care Centers
(2) Baby Nurses
(3) Babysitting Needed to Aid Sick Person
h. Cosmetic Surgery
i. Transportation
(1) In General
(2) Automobile Expenses
(a) Auto Standard Rate
(b) Depreciation
(3) Distant Travel
(4) Lodging
(5) Companions
(6) Commuting Expenses
(7) Pre-Employment Expenses
(8) Loss on Sale of Home
j. Personal Attendant and Nursing Services
k. Specific Medical Services
(1) Nature of Provider
(2) Type of Care
(3) Other Situations
l. Education Expenses
(1) College Tuition
(2) Special Education
(3) Regular Education
m. Inpatient Care
(1) Hospitals
(2) Institutions Other Than Hospitals
(3) Life-Care Residences
5. Timing of Deduction
a. In General
b. Payments Made with Borrowed Money
c. Prepayment
(1) In General
(2) Exception
d. Reimbursements
(1) Reimbursements of Expenses Deducted in Previous Year
(2) Reimbursements Received in Year Expenses Are Paid
6. Substantiation
B. Personal and Dependency Exemptions
1. In General
2. Personal Exemptions
a. Taxpayer
(1) In General
(2) Exception
b. Spousal
(1) In General
(2) Gross Income
(3) Proof
(4) Joint Return
3. Dependency Exemptions
a. In General
b. Exceptions
(1) Dependents of Other Taxpayers
(2) Dependents Filing Joint Returns
(3) Citizenship
(a) In General
(b) Citizen
(c) Resident
(d) Constitutionality
c. Qualifying Child
(1) In General
(2) Qualifying Child Relationship Requirement
(3) Age Requirement
(4) Same Principal Place of Abode (Residency Requirement)
(5) Two or More Taxpayers Eligible to Claim Qualifying Child (Tiebreaker Rules)
d. Qualifying Relative
(1) In General
(2) Qualifying Relative Relationship
(a) In General
(b) Dependents of Spouses
(c) Determination of Particular Relationships
(d) Household Test
(i) In General
(ii) Occupation and Maintenance
(iii) Exceptions
(A) Spouse
(B) Relationship Violating Local Law
(C) Employees
(3) Gross Income Condition
(a) In General
(i) Definition
(ii) Specific Types for Dependency Exemption Purposes
(iii) Sources
(iv) Cost of Goods Sold and Deductions
(b) Income of Handicapped Persons
(i) In General
(ii) Sheltered Workshop
(iii) Permanently and Totally Disabled
(c) Proof
e. Support Conditions
(1) In General
(2) Provided by Taxpayer
(a) Amount Taxpayer Obligated to Provide
(b) Amounts Provided by Others
(c) Amounts Not Support Provided by Taxpayer
(d) Timing
(e) Child Support Arrearages and Prepayments
(3) More Than One-Half
(a) In General
(b) Support Provided by the Individual
(c) Support Provided to the Individual
(d) Multiple Support Agreements
(4) Support
(a) Items of Support in General
(b) Lodging
(c) Education
(d) Medical and Dental Care and Insurance
(e) Automobiles and Boats
(f) Items Not Included in Support
(i) In General
(ii) Visitations
(iii) Capital Expenditures
(iv) Medical Expense Reimbursements
(g) Amount of Support Items
(h) Scholarships
(i) In General
(ii) Military Payments
(iii) Disabled Individuals
(5) Proof
(a) In General
(b) Specific Proofs
(c) Compliance with Burden of Proof
(d) Evidence
(6) Constitutionality
f. Child
(1) In General
(2) Legally Adopted Child
(3) Eligible Foster Child
(4) Acknowledged Child
(5) Deceased Children
(6) Unborn Children
g. Student
(1) In General
(2) Full-Time Attendance
(3) Full-Time On-Farm Training
(4) Qualified Educational Organization
h. Children of Divorced or Separated Parents
(1) In General
(2) Applicable Child
(3) Exemption Allowed to Custodial Parent
(4) Release of Exemption by Custodial Parent
(5) Certain Pre-1985 Instruments
(a) In General
(b) Qualified Pre-1985 Instrument
4. Exemption Amount
a. In General
b. Personal Exemption Phaseout (PEP)
(1) In General
(2) Threshold Amount and Applicable Amount
(3) Applicable Percentage
(4) Reduction and Elimination of the Phaseout
C. Child Tax Credit
1. In General
2. Computation
a. Basic Credit
b. Income Limitation
c. Limitation Based on Amount of Tax
d. Refundable Portion of Child Tax Credit
3. Qualifying Child
a. In General
b. Identification Requirement
4. Short Taxable Years
5. Refunds of Child Tax Credit Disregarded for Purposes of Federal Programs and Federally Assisted Programs
D. Household and Dependent Care Credit
1. In General
2. Qualifying Individuals
a. In General
b. Physical or Mental Incapacity
c. Divorced or Separated Parents
3. Computation of Credit
a. In General
b. Applicable Percentage
c. Employment-Related Expenses
(1) In General
(2) Employment Related
(3) Household Services
(4) Care of Qualifying Individual
(5) Services Outside Household
(6) Exceptions
(a) Overnight Camp Exception
(b) Payments to Related Individuals
d. Limitations
(1) Dollar Limitation
(2) Earned Income Limitation
(a) In General
(b) Marital Status
(c) Earned Income
(d) Student Spouses and Spouses Incapable of Self-Care
4. Coordination with Medical Expense Deduction
5. Joint Return Requirement
6. Substantiation and Recordkeeping
E. Credit for the Elderly and Disabled
1. In General
2. Qualified Individuals
3. Computation of Credit
a. In General
b. Initial §22 Amount
(1) In General
(2) Disability Income Limitation
c. Benefits Amount Reduction
d. Excess Adjusted Gross Income Amount Reduction
4. Failure to File Joint Return
F. Adoption Credit
1. In General
2. Limitations
a. Dollar Limitation
b. Income Limitation
c. Limitation Based on Amount of Tax
(1) 2000-2009
(2) 2010–2011
(3) Tax Years Beginning After 2011
3. Qualified Adoption Expenses
4. Eligible Child
5. Child with Special Needs
6. Failure to File Joint Return
G. Adoption Assistance Exclusion
1. In General
2. Limitations
a. Dollar Limitation
b. Income Limitation
3. Adoption Assistance Program
H. Dependent Care Assistance
1. In General
2. Limitations on Exclusion
3. Dependent Care Assistance Program
I. Health Insurance Premium Tax Credit (Affordability Credit)
1. In General
2. Eligibility
3. Credit Amount
a. In General
b. Coverage Month
c. Adjusted Monthly Premium
d. Applicable Benchmark Plan
e. Applicable Percentage of Household Income
f. Additional Benefits
g. Pediatric Dental Coverage
h. Individuals Not Lawfully Present
4. Reconciliation of Credit and Advance Payments
J. ABLE Programs and Accounts
1. Background
2. ABLE Program Qualification
3. Eligible Beneficiaries
a. Disability Determination/Certification
b. Change in Eligibility Status
c. Recertification of Eligibility Status
4. Account Contributions
a. Annual Contribution Limit
b. Aggregate Cumulative Account Limit
c. Gift Tax Consequences
d. Excise Tax on Excess Contributions
e. Return of Excess Contributions and Excess Aggregate Contributions
5. Taxation of ABLE Account Distributions
a. Distributions Used for Qualified Disability Expenses
b. Distributions Not Used for Qualified Disability Expenses
c. Rollovers and Designated Beneficiary Changes
d. Gift Tax Consequences
6. Transfer of ABLE Assets to State on Death of Beneficiary
7. Coordination with Other Government Programs
8. Extent of ABLE Account Protection in Bankruptcy
9. Information Reporting for ABLE Accounts
10. Ancillary Matters
IV. Exceptions Relating to Household Expenses
A. Home Mortgage Interest Credit
1. In General
2. Computation of Credit
3. Mortgage Credit Certificate
4. Qualified Mortgage Credit Certificate Program
5. Limitations
a. Excess Credit Rate
b. Related Mortgagees
c. Limitation Based on Amount of Tax
d. Effect of Tax Liability Limitation
6. Reporting Requirements
B. Reimbursements for Certain Excess Living Expenses
1. In General
2. Amounts Included as Reimbursements
3. Qualified Loss of Use or Occupancy
4. Exclusion Limitation
C. Qualified Foster Care Payments
1. In General
2. Qualified Foster Care Payment
3. Qualified Foster Individual
4. Qualified Foster Care Placement Agency
5. Difficulty of Care Payments
6. Limitations
D. Housing and Related Assistance
1. Mortgage and Interest Payment Assistance
2. Energy Conservation Assistance
3. Rehabilitation Assistance
4. Relocation Assistance Payments
E. Disaster Relief and Crime Victim Programs
1. Disaster Relief
a. Qualified Disaster Relief Payments
b. Qualified Disasters
c. Form of Payment and Expense Accounting
d. Floods
e. September 11, 2001 Attacks
f. Other Disasters
2. Air Transport Disaster Payments
3. Crime Compensation

Working Papers

Table of Worksheets
Worksheet 1 Personal Exemption Tables
Worksheet 2 IRS Forms and Schedules for Claiming/Reporting Credits
Worksheet 3 Tables: Periodic Payments Received under Long-Term Care Insurance Contracts; Eligible Long-Term Care Premiums; Adoption Credit; Adoption Assistance Programs; Health Insurance Premium Tax Credit (Affordability Credit)
Worksheet 4 Client Letter — Medical and Dental Expenses