adoption expenses

[DaveinTexas]

Here's a toughy.

I know that medical expenses to birth a child that will be adopted by the taxpayer are included in the adoption expenses that qualify for the adoption credit.

If the taxpayer takes an early withdrawal from her 401K to pay for the medical expenses for the mother, do these expenses also qualify for the 10% penalty exception?

Technically, these are medical expenses for the taxpayer's dependent. I just can't find anything in the code that deals with this issue.

Any help would be appreciated.

[jainen]

going to be okay

>>Technically, these are medical expenses for the taxpayer's dependent.<<

I'm not sure this is true, but I'm also not sure the code requires it. It's worth looking up to see whether the medical exception to early withdrawal really specifies who the expenses are for.

Obviously Congress has decided to support adoption. I doubt that the IRS would be interested in challenging reasonable expenses in that regard. Unless you find the regs are clearly against it, it's probably going to be okay.

[DaveinTexas]

That's what I thought

This is what the code states:

section 213(a)
(a) Allowance of deduction
There shall be allowed as a deduction the expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, his spouse, or a dependent (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof), to the extent that such expenses exceed 7.5 percent of adjusted gross income.

And as you said I do not find anything against my conjectures so I will run with it.

Thanks.

[Brad Imsdahl]

I’m not saying you can’t do it, but some caution is in order here. Just because something seems logical and fair doesn’t mean IRS is going to give it a pass.


IRC Section 72(t)(2)(B) says distributions from a qualified retirement plan to pay for unreimbursed medical expenses during the year to the extent they exceed 7.5% of AGI, regardless of whether or not the participant itemizes deductions, are not subject to the 10% early withdrawal penalty.

Point (1), it only applies to medical expenses to the extent they exceed 7.5% of AGI. Distributions to pay for expenses that do not exceed 7.5% of AGI is subject to the 10% early withdrawal penalty.

Point (2), this code section applies to medical expenses deductible under code section 213. It says nothing about qualified adoption expenses. Even though medical expenses may qualify under the adoption expense credit rules, that does not necessarily mean the same expense is going to qualify as a medical expense deduction under Section 213.

TTB page 4-5 answers the question “whose medical expenses are deductible.” To claim a medical expense deduction, the person whose medical expenses you are paying has to be for you, your spouse, or your dependent. The term “dependent” for medical expense purposes is less restrictive than those for dependency expense purposes, but one of the rules is you still have to support the person you are paying the medical expenses for.

So the real question here that must be addressed: Is the medical expenses of the mother of the child you are about to adopt the expenses of your soon to be dependent child? Or are they the medical expenses of the mother, who is not your dependent?

I don’t know the answer. I agree there should be no problem with claiming an adoption expense deduction for this, but I think it could be a stretch to pull the Section 72(t) exceptions to the 10% early withdrawal penalties into this mix. The point is, you would have to claim they are for the soon to be adopted child to qualify for the medical expense deduction, which is the same requirement for the exception to the 10% early withdrawal penalty.

[DaveinTexas]

pulling out the big guns

I never get responses for my questions, or not many for that matter.

It's an honor to draw such attention for my very specific question. You are correct about the following:

Point (2), this code section applies to medical expenses deductible under code section 213. It says nothing about qualified adoption expenses.

That is what boggles my mind. It seems that the code does not address this issue. And to bring up another issue:

If you use the medical expenses for the adoption credit, can you then use the same expenses for the exception for the 10% penalty?

Anyway, I really appreciate the time and effort you guys put forth to address some really complex issues we deal with everyday. And by the way, kudos to the whole Tax Book staff for not only offering an excellent product, but also to take the time to provide insight to our questions----and for FREE!!! What a country!

Thanks again Brad and thank your staff. Also thank you Jainen for your unrelenting pursuit of the truth.

[jainen]

nice of you

>>unrelenting pursuit of the truth<<

It's nice of you to say so, but I find it ironic. My answer to your question was (most uncharacteristically) go ahead and claim it anyway because the IRS won't challenge you.

[Brad Imsdahl]

I’m glad you like our book. Thanks for the compliment. Participating on this message board helps us to improve the book, as tax issues discussed give us new ideas.

As to the question on using the mother’s medical costs as an adoption expense and an exception to the 10% penalty, it would be no different than using the same medical expense for a deduction on Schedule A and an exception to the 10% penalty. Its not double dipping because you are not trying to take two deductions for the same expense. As long as you are taking the position that the mother’s medical costs are actually the medical costs of the soon to be dependent adopted child, then it should qualify for both the adoption expense credit and the exception to the 10% penalty.

[sea-tax]

Not trying to be political or anything but in order for one to be a dependant don't they have to be a person legaly speaking. I mean the soon to be child if still unborn is not yet a person in the eyes of the law. So how can the fetus be a dependant?

Like I said I am not trying to start a political discussion about prolife vs proabortion. I just had these questions come to mind upon reading this topic. Any clarification would be welcomed. Thanks.