Here’s How You Can Deduct the Medical Expenses of Others

Before explaining how you can deduct medical expenses incurred by others, let’s review a related new tax break that was snuck into one of the year-end spending bills Congress passed before its recess in
December.

You know medical expenses are deductible only when they exceed 10% of adjusted gross income (AGI). In the December legislation a special rule was inserted for tax years 2019 and 2020. The floor is reduced to 7.5% of AGI, which was the limit before it was increased under the Affordable Care Act. I reviewed how the floor on medical expense deductions works in last month’s issue (January 2020). Everything is the same, except the floor is reduced to 7.5% of AGI.

As a result, some people will be able to deduct more medical expenses than they realized on their 2019 and 2020 returns, and others who thought they wouldn’t be able to deduct any medical expenses now are able to.

Last month, we discussed the medical expense deduction and discovered more expenses are deductible than most people realize.

This month, we’re going to review how you might be able to deduct the medical expenses paid on behalf of someone who’s not in your immediate family. Sometimes you can deduct the medical expenses you pay for someone else, even someone who’s not living with you. I frequently run into people who aren’t taking full advantage of this tax break, especially when they’re helping care for an aging parent or other relative.

You can deduct the medical expenses you paid that were incurred by you, your spouse or someone who was your dependent at the time. Though we no longer can take dependent exemptions on our tax returns, the definition of a dependent
continues to be used in this and other circumstances.

A dependent is a child or other qualifying relative. Qualifying relatives cover a broad swath. They include siblings and half siblings and any child of them. Parents and their ancestors are included. Step-relatives and in-laws also are qualified relatives.

A relative doesn’t have to live with you during the year to qualify as a dependent. A person who isn’t a relative qualifies as a dependent when they lived with you all year as a member of your household and the relationship didn’t violate local law. To be your dependent, a person can’t file a joint return with another person, except to claim a refund.

Another qualification for a dependent is that, whether the person is a relative or not, you must have provided over half of his or her support during the year. Support is living expenses such as clothing, housing, education, medical expenses, recreation and transportation. If the person lives with you, the fair market rental value of the housing is included in the support amount.

So, if you’re helping with the medical expenses of a parent, sibling, or child (including in-laws and step relatives), you might be able to deduct those expenses. These rules most often come into play when a person is helping with the medical or long-term care needs of a relative, usually a parent. You might be able to deduct some or all of the cost of a nursing home or assisted living residence, depending on the reasons the person is in the residence and on the type of care received. Care provided in your home or the dependent’s home also might be deductible by you.

When the primary reason for residing in a nursing home is one’s physical condition and the need for readily available medical care, the entire cost of the nursing home is deductible. But if medical care is not the primary reason for residing in the nursing home, especially if the resident needs primarily custodial care, only the specific costs attributable to medical and nursing care are deductible. Payments for food, lodging and other personal expenses are not deductible in that case.

Deducting the cost of assisted living or home care is trickier because an assisted living residence or a home primarily is a residential facility, not a medical facility. Deductions are limited the most for residents who can perform at least five of the six activities of daily living (eating, toileting, transferring, bathing, dressing and continence). These individuals deduct only the portion of the costs that are directly for nursing care or other medical care.

But when the assisted living resident cannot perform two or more of the activities of daily living, the entire cost of the facility can be deducted if the resident has a plan of care in place. A plan of care can be drawn up by a physician, nurse, or physical therapist.

In one court case, a patient was chronically ill due to dementia and her doctor believed caregivers were necessary around the clock for medical reasons, as well as for safety. Because the patient had a plan of care in place and her doctor believed her diminished capacity made the caregivers necessary, the Tax  Court held that the payments to the caregivers were deductible as medical expenses. (Estate of Lillian Baral, 137 T.C. No. 1, 2011)

A long-term care provider usually itemizes bills so that you can see which expenses were for medical care and which for personal care.

The cost of care provided at the patient’s home, including care provided by relatives, can be deductible. The care must be medically necessary or due to medical conditions. When a relative provides the care, there must be a written agreement describing the care that will be provided and the compensation for it. The pay must be reasonable for the care provided, and the person paid must be qualified to give the care.

Without a written agreement spelling out the details, the IRS will assume that a relative providing care is doing so without expectation of payment. (Estate of Olivo v. Commissioner, T.C. Memo. 2011-163)

There can be a lot of money at stake, especially when you’re helping with significant medical or long-term care needs of a relative. It might be worthwhile to review the rules with a tax advisor. More details are available in IRS Publications 17 and 502, available free on the IRS website at www.irs.gov.