Built on the foundation of the Tax Management Portfolios™, Bloomberg Tax is a comprehensive tax research solution designed by tax practitioners for tax practitioners.
By Kathleen Ford Bay, Esq.
Richards Rodriguez & Skeith LLP, Austin, TX
The recently decided Tax Court case of Baral Est. v. Comr.,1 addresses the treatment of expenses for long-term care that may qualify as income tax deductions, an issue that many of us are or will be addressing for ourselves and our clients.
The decedent, Lillian Baral's brother, David, as her agent, paid in 2007 the following expenses related to her care: $760 to her doctor and the New York University Hospital Center, $5,566 to reimburse her caregivers for needed supplies, and $49,580 to the caregivers for services. The issue was: Did these payments qualify as "medical care" per §213(d)(1), thus making them income tax deductible to the extent they exceeded 7.5% of adjusted gross income? The Tax Court Judge clearly provided assistance to the brother in meeting the proper criteria for deductibility for the majority of the expenses, though the brother was unable to submit all the proof needed for all the deductions he claimed. Had the brother planned ahead and so had all the proof ready, the case may never have made it all the way to the Tax Court.
Payments to the doctor and hospital were allowed as deductions for medical care, but they only amounted to $760. Payments to the caregivers would qualify only if they were for long-term care services as defined in §7702B(c). The better way to establish deductibility is to have the doctor (or other licensed healthcare practitioner) prescribe a plan of care after certifying that the patient is chronically ill and unable to perform at least two of the following six activities of daily living for a period of at least 90 days because of a loss of functional capacity: eating, toileting, transferring, bathing, dressing, and continence. Because the doctor had advised that the patient had dementia and needed 24-hour care, without doing a plan and without specifying which of the six activities the patient could not do, the court had to look at another criterion: Did Lillian Baral require substantial supervision to protect her from threats to her health and safety because of severe cognitive impairment? As Lillian Baral was cognitively impaired because of dementia, she could not take her prescription medicine properly, which was a danger to her health. Thus, the cost of the caregivers was deductible after the 7.5% adjusted gross income threshold was met.
Lillian's brother did not timely file a 2007 income tax return for her. In a footnote, the opinion notes that Lillian Baral's mental condition was no excuse for failing to file a return and pay taxes. The case does not address three lurking problems that come with the territory, so to speak, when hiring caregivers: Did the brother withhold income taxes and social security? Did the brother treat the caregivers as independent contractors or as employees? Did the caregivers report the payments as income on their tax returns? The opinion states that the brother first used a caregiving company and then, because of the cost, hired the caregiver directly. Part of the reason that the company charged more than the caregiver directly has to do with the cost of compliance and keeping the books. Another, darker, part is that some individual caregivers work "off the books" and, by doing so, are able to charge less than a company that must comply with state and federal mandates.
For more information, in the Tax Management Portfolios, see Maule, 503 T.M., Deductions: Overview and Conceptual Aspects, Maule, 507 T.M., Income Tax Liability: Concepts and Calculation, Maule, 513 T.M., Family and Household Transactions, and Moore and Landsman, 816 T.M., Planning for Disabilityand in Tax Practice Series, see ¶2840, Medical Expenses.
1 137 T.C. No. 1 (2011).
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)