Taxpayers May Be Able to Deduct a Relative's Medical Expenses

As the deadline for filing 2014 tax returns rapidly approaches, you may be scrambling to shore up deductions for clients, especially those involving deduction “floors” in the tax law. For example, the medical expense deduction could be a cliffhanger for some clients. Generally, a deduction is allowed only if your unreimbursed expenses exceed 10 percent of your adjusted gross income (AGI) for 2014 (7.5 percent of AGI if the taxpayer is age 65 or older).

Don’t forget to include medical expenses the client pays on behalf of a relative such as an elderly parent in a nursing home or a child who graduated from college last year. Little-known fact: It may be possible to add qualified expenses paid for a relative who technically doesn’t qualify as your dependent.

In the usual situation, you can include medical expenses you paid for yourself, your spouse or any dependent in the total of expenses counting towards the 10 percent-of-AGI floor. Other special rules may come into play if you’re collectively paying for medical expenses under a multiple support agreement.

However, you may support someone who doesn’t qualify as a dependent under the tax law’s definition. Generally, to claim a dependency exemption for a person, you must provide more than half of the person’s annual support and he or she can’t have more than the personal exemption amount in taxable income. The personal exemption amount in 2014 is $3,950 (increasing to $4,000 in 2015).

The “gross income” part of the dependency test doesn’t apply to a child who is under age 19 or is a fill-time student under age 24. But this part of the test often trips up taxpayers who support an elderly relative with investment income.

Nevertheless, the IRS says you can still deduct medical expenses paid on behalf of an individual who would otherwise qualify as your dependent except that:

He or she received gross income of $3,950 or more in 2014;
He or she filed a joint tax return for 2014; or
You (or your spouse if filing jointly) could be claimed as a dependent on someone else’s 2014 return.

Let’s look at a hypothetical example. Suppose your client’s mother annually receives $10,000 in Social Security benefits and earns $4,500 from her investments.

In 2014, the client paid Mom’s monthly rent of $1,000, for a total of $12,000, and also paid $3,000 of her medical expenses. So the client provides more than half of his mother’s support for the year – $15,000 to $14,500 – but he can’t claim her as a dependent because Mom has more than $3,950 in taxable income.

On these facts, the client can add the medical expenses paid for his mother to his own total for tax return purposes. This might push him over the 10 percent mark or increase an allowable medical expense deduction.

If a client falls just short of the threshold for deducting medical expenses, follow the old adage: If you don’t succeed at first, try, try again. Records should be scoured for expenses paid on behalf of relatives and other charges that may have fallen through the cracks.

Income Tax