As with all new clients, I request their most recent tax return in this case 2012. $50K AGI minus $57K itemized deductions obviously resulting in a negative amount on line 40 on form 1040. I asked the TP if the previous preparer asked for supporting docs regarding the 56K of medical expenses. TP replied no. I never had a client with this high of itemized deductions to AGI. Would you ask for supporting docs regarding the medical exps?
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Medical Expenses
I would not necessarily require supporting documentation for all of the medical expenses. But I would certainly ask a lot of questions, while trying not to be too invasive.
Shooting from the hip, a few important questions come to mind:
(1) Were all those expenses really paid during the year in question, or was some of it just billed? I know that's a no brainer for us, but a lot of clients really don't get it. If they pay a doctor bill with a credit card in December, then it is a deductible medical expense, even if they don't pay the credit card bill until six months later. But if they simply haven't paid the doctor bill, it's not a deductible expense. From the client's perspective, what's the difference? Either way, they owe the money. So it must be deductible in the year they went to the doctor, right?
(2) Does the client understand that the bills alone are not enough in an IRS audit? They would have to show proof of payment as well.
(3) Have they properly accounted for insurance reimbursements? Do they realize that reimbursements in a later year are taxable income?
BMKBurton M. Koss
koss@usakoss.net
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The map is not the territory...
and the instruction book is not the process. -
Billed vs. paid makes sense. It could also be they had the money to pay stashed away. Sell 100k of stocks at $20k gain and paying $56k of medical is no issue, even though you aren't showing $56k of gains. Or savings account. Or home equity loan. Etc.
If I were doing the return my question would be "How did you pay for the medical expenses?" If it makes sense then sure, I'd take the deduction. If it turns out they didn't pay the bills then no deduction.Comment
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My standard answer to a TP when the return approaches no tax or NOL is that we need to make sure all the deductions are correctly documented, especially med deductions that are not co-pays, deductibles, scripts etc. I have had to break the bad news that a $5000 face life is not deductible! Some taxpayers will count over the counter meds, vitamins, supplements as part of their script cost!Taxes after all are the dues that we pay for the privileges of membership in an organized society. - FDRComment
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Face lifts aren't deductible ? ! ?
Excuse me, I need to call and cancel a procedure..."The only function of economic forecasting is to make astrology look respectful" - John Kenneth GalbraithComment
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This would not be unusual for nursing home expenditures. But I would definitely want the documentation. Was that just a one-year thing?Comment
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I have a client for their second year whom hit $50,000 in medical expenditures for assisted living home care (the medical end of it; not rent), which wiped out their taxable pension and taxable social security portion of income and THEN some by quite a bit. She's 97 (I do her 68 year old sons taxes as well) and they haven't tapped her dry yet.....so she can keep deducting those expenses on her return. At some point, if she's still around, she'll be broke and the state will start paying for her care. In the meantime, yep, totally legit to have more in medical deductions than in actual income in THIS type of scenario.
~BeckyComment
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