Qualifying Relative & Mulitiple Support test

[mactoolsix]

Dad is 87 yo in assisted living. His income is in excess of the $3,950.

Son & Daughter are paying for 24 hour care = $120K @ year.

Per Pub 502:
You can include medical expenses you paid for an individual that would have been your dependent except that:
. He or she received gross income of $3,950 or more in 2014, . . .

Together, the kids provide over 50% of Dad's support. Son 40%, daughter 30% and Dad 30%.
Thus neither are actually providing over 50%.

I'm assuming the multiple support agreement from Pub 501 would apply to allow the kids to still deduct the medical expenses they each paid.

The concern is Dad can not be a qualifying relative for each them in the same year. Thus one year, the Son claims the medical he paid ($80K). Is there anyway the daughter could claim the $40K in medical she paid?

Then the next year when the daughter claims the $40K she paid, what about the $80K the son paid. Seems like, because of the multiple support agreement, there's a huge medical deduction lost each year.

Any thoughts . . . . ?

Thanks,
Mike

[Koss]

Medical Expenses

Although I have not reviewed all of the rules you are citing, I agree with your conclusion. He is not actually a dependent of any of the children. One person can claim the medical expenses if he would have been their dependent, but for the gross income test. But you cannot reasonably take the position that he would have been the dependent of more than one person in the same year.

So it does seem that the medical expense deduction is lost for the person who cannot, and could not have, claimed him as a dependent.

The solution, going forward for 2015 and future years, might be for one child to gift the money to the other child, so that one child is then paying all of the medical expenses. That child can then take him as a dependent and deduct all of the medical expenses. This might also have the effect of pushing the support level over 50%, thereby rendering the multiple support agreement unnecessary.

But the amount of money you are talking about would probably trigger a requirement to file a gift tax return.

With that being said, the logistics are not all that complicated. The adult children should simply open a joint checking account to pay all those medical expenses. They each deposit money. Then they can figure out at the end of the year who would benefit more from the dependent exemption and medical expenses, and they decide who gifted money to whom...

Maybe a little too creative for some people's tastes, but c'mon... Is it really that different from the way partnerships get to make decisions and allocations of distributions after the close of the tax year?

BMK

[Gary2]

Alternatively, would it work to have one sibling loan the funds to the other, with a written promissory note? There would have to be interest (either actual or imputed), but they may be more comfortable with this concept versus gifts.

[Koss]

Loan?

Alternatively, would it work to have one sibling loan the funds to the other, with a written promissory note? There would have to be interest (either actual or imputed), but they may be more comfortable with this concept versus gifts.

Yeah, but even with a promissory note, in a full-blown audit, the loan would be treated as a sham unless the borrower actually made payments on the loan...

BMK

[mactoolsix]

A bit more information

Maybe I should also state:

Dad owns a condo (minimal income) which will be inherited by the kids in due time, thus "paying back" medical expenses they paid.

Dad selling the condo would cause huge CG tax & NIIT as the basis is very low, thus they are opting to just pay the medical, take any possible deduction allowed and then wait to be reimbursed from the inheritance.

The kids have a very amicable agreement to do do whatever works - they sort out the necessary percentages when all is done.

Thanks for your responses!

Mike

[Roland Slugg]

The loan idea mentioned above is the best one, IMO, and it certainly would not be regarded by the IRS as a sham. The loans would be repaid the following year, and the the loans would go in the opposite direction. Actually since Son pays two-thirds of the expenses and Daughter pays only one-third, it might be more equitable for S to take dad as a dependent two years out of three and D claim dad as a dependent one year out of three.

I'm wondering, however, about that $120k they pay to keep dad in an assisted living facility. Do you have some reason to believe that the entire amount qualifies as a medical deduction? In most cases very little of that kind of expense is a legitimate medical expense, and for most people who live in such apartments/facilities none of the cost qualifies as a medical expense.

[mactoolsix]

I'm wondering, however, about that $120k they pay to keep dad in an assisted living facility. Do you have some reason to believe that the entire amount qualifies as a medical deduction? In most cases very little of that kind of expense is a legitimate medical expense, and for most people who live in such apartments/facilities none of the cost qualifies as a medical expense.

Yes, we will allocate the care-giver expense using the method described in Pub 502 under nursing services.
He requires 24 hour care - everything from getting out of bed, transfer to toileting, bathing, dressing, feeding, and meds management.
Do you have a better guideline?

http://www.irs.gov/publications/p502/ar02.html#en_US_2014_publink1000178989

Thanks,
Mike