Nursing Home Expenses Deduction

[JohnH]

Taxpayer has dementia and has recently become a resident in a skilled nursing facility since the person can't keep up with medications and need help with ADL's after being discharged from a hospital. Medicare and supplemental insurance will cover the first 100 days of rehab, then the taxpayer must begin paying.

Taxpayer will have a bill in hand for about $10K by the end of Dec, most of which (but not all) is expected to be paid by Medicare & insurance in the coming months. The Medicare and insurance payments are contingent on continuing progress in rehab.

Since the $70K of expected nursing home expenses in 2009 will exceed taxable income, there will be some lost tax benefit in 2009. If taxpayer pays the full $10K for the current year in Dec 2008, then they will receive a credit for the part paid by third parties in 2009 against the 2008 charges.

Seems to me it would be prudent to pay the $10K (assuming neither Medicare nor insurance have paid anything against it by Dec 31) in order to derive some tax benefit in 2008. Is there any requirement that the taxpayer reduce the tax deduction by "expected" reimbursements?

[solomon]

It seems to me there would be a recovery on Line 21 in 2009 of the tax benefit from the 10K deduction in 2008 - assuming insurance did not pay in 2008.

[JohnH]

Thanks for the reminder on the income.

As a practical matter in this particular case, it doesn't matter whether 1) the Medicare/insurance reimbursement is reported on Line 21 of the 2009 return and the full 2009 medical expense deduction of $70K is taken, or 2) whether the Medicare/insurance payment will be credited against future invoices and the taxpayer will just pay the difference in 2009 and take a $60K deduction in 2009.

Taxpayer's AGI is about $50K, so either way the net result will be the same in 2009, because the taxpayer already pays tax on the full 85% of SocSec benefits and the itemized deductions will wipe out taxable income even if the Med Expense limitation is increased by 7.5% of the $10K under scenario # 1. Taxable income in 2009 will be reduced to zero either way, especially since the taxpayer also has property tax and contributions deductions in addition to the medical expenses.

I'm thinking the actual scenario will be #2 because the Medicare/insurance payment will go directly to the nursing home and the future invoices will be net of the third-party payments.

My main concern is the voluntary payment of expenses in 2008 when it is virtually certain (but no guaranteed) that there will be a substantial reimbursement in early 2009. Seems to me a cash basis taxpayer is free to do this if they so choose, but I want to be sure there isn't some information somewhere to the contrary.

[solomon]

My main concern is the voluntary payment of expenses in 2008 when it is virtually certain (but no guaranteed) that there will be a substantial reimbursement in early 2009. Seems to me a cash basis taxpayer is free to do this if they so choose, but I want to be sure there isn't some information somewhere to the contrary.

Because there is no guarantee of reimbursement, perhaps one could follow the casualty principle of reimbursement.

That is to say, if it is reasonably uncertain the loss might not be reimbursed, then take the deduction in the year occurred.

[JohnH]

---> the casualty principle of reimbursement <----

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