Itemized Deduction

[EA Carol]

Father passed away and Mother is the conservator/legal guardian of minor child. Mother pays medical bills out of childs income. Can I deduct that on the Mothers tax return?
Thanks

[Roland Slugg]

Dear EA Carol

No, not if the expenses are paid with the child's OWN funds. If the child is required to file a return, he can deduct the expenses ... subject to the 7.5% floor, of course. Having said that, if the mother pays the expenses using HER funds, and the child pays the mother some sort of monthly or annual "support" payment ... sort of like child support ... she should be able to deduct the medical expenses on her return.

[Bees Knees]

Technically I agree with Roland.

However, I can see where the child and Mother may have a special bond, as mother and child ususally do. Child says to mom; "Mom, you deserve a gift. Here, take some money for being so good to me." Mom says; "Thank you for the gift. Here, let me thank you by paying your medical bills."

Mom deducts the medical bills.

[New York Enrolled Agent]

Technically I agree with Roland.

However, I can see where the child and Mother may have a special bond, as mother and child ususally do. Child says to mom; "Mom, you deserve a gift. Here, take some money for being so good to me." Mom says; "Thank you for the gift. Here, let me thank you by paying your medical bills."

Mom deducts the medical bills.

Please!!!!!!!!!! "Father passed away and Mother is the conservator/legal guardian of minor child"

I expect more out of you Bees - substance over form??? The original post indicates a minor child - good chance a surrogate or other court action was taken to protect the child's interests. In all the situations I've encountered the remaining parent needs to justify appropriate child expenses and needs court ok before monies are removed from accounts. I don't see too many judges (probably none) allowing the "gift" to mom so she can pay her own medical expenses.

[Black Bart]

Aw, give the guy

...I expect more out of you Bees - substance over form???...

a break NYEA. It sounds like he's mellowing with age and nobody should be faulted for that. Although it's unprecedented for Bees to say things like "Techinically I agree..." or "I can see where..." and "Mom deducts..." (sounds like statements I'd make), we shouldn't look a gift horse in the mouth. After all, who knows when you yourself (a strict and well-versed tax scholar) might some time in the future need to avail yourself of a fast and loose interpretation to make a quick buck.

[Bees Knees]

I expect more out of you Bees - substance over form??? The original post indicates a minor child - good chance a surrogate or other court action was taken to protect the child's interests. In all the situations I've encountered the remaining parent needs to justify appropriate child expenses and needs court ok before monies are removed from accounts. I don't see too many judges (probably none) allowing the "gift" to mom so she can pay her own medical expenses.

The original question is not whether mom can pay her own medical expenses, and I never suggested she could. Re-read the posts. It is about mom paying the child's medical expenses using the child's money, and whether mom gets to claim a medical expense deduction.

I will concede I don’t have any citations for this specific issue. However, it is not as far fetched as you claim it to be.

It is the exact same principle used to justify why education expenses paid by a dependent student or a third party can be claimed by the parent.

Reg. Sec. 1.25A-5 says:

§ 1.25A–5 Special rules relating to
characterization and timing of payments.
(a) Educational expenses paid by
claimed dependent. For any taxable year
for which the student is a claimed dependent
of another taxpayer, qualified
tuition and related expenses paid by
the student are treated as paid by the
taxpayer to whom the deduction under
section 151 is allowed.
(b) Educational expenses paid by a
third party—(1) In general. Solely for
purposes of section 25A, if a third party
(someone other than the taxpayer, the
taxpayer’s spouse if the taxpayer is
treated as married within the meaning
of section 7703, or a claimed dependent)
makes a payment directly to an eligible
educational institution to pay for a
student’s qualified tuition and related
expenses, the student is treated as receiving
the payment from the third
party and, in turn, paying the qualified
tuition and related expenses to the institution.

In other words, the parent gets to claim the credit for a dependent because the parent is treated as receiving a gift from the dependent and then using the gifted money to pay for the expense. Same as if a third party (such as a grandparent) pays the expense. It is treated as a gift from grandma to grandchild, who in turn gifts the money to mom and dad, who in turn pay the tuition and claim the credit.

Again, its not the same rule, but it is the same principle. I also remember reading a court case years ago about a corporation making a gift to the spouse of a deceased shareholder/employee, and the court allowing it.

[New York Enrolled Agent]

The original question is not whether mom can pay her own medical expenses, and I never suggested she could. Re-read the posts. It is about mom paying the child's medical expenses using the child's money, and whether mom gets to claim a medical expense deduction.

It is the exact same principle used to justify why education expenses paid by a dependent student or a third party can be claimed by the parent.

First my last sentence was defective - let me change it by inserting the word "child's":

I expect more out of you Bees - substance over form??? The original post indicates a minor child - good chance a surrogate or other court action was taken to protect the child's interests. In all the situations I've encountered the remaining parent needs to justify appropriate child expenses and needs court ok before monies are removed from accounts. I don't see too many judges (probably none) allowing the "gift" to mom so she can pay her own child's medical expenses.

Two comments:
#1 If the child's money is under Court authority and mom is the conservator/guardian, funds will be released only on the presentation of documentation of legitimate child expenses. For example, I needed to send letters to Surrogate Court in NY for two clients (parents of minor children) in order to get funds released to pay the child's tax obligation and my fee. You must present evidence to get funds released. The Court will allow medical bills to be paid but to the provider of the services.

#2 I don't think the "principle" is the same. The education issue is statutory. See §25A(g). There is no statutory provision for child's money, gifted to mom, then used to pay child's medical expenses so mom can take a tax deduction. IMO, still substance over form.

[Bees Knees]

Two comments:
#1 If the child's money is under Court authority and mom is the conservator/guardian, funds will be released only on the presentation of documentation of legitimate child expenses. For example, I needed to send letters to Surrogate Court in NY for two clients (parents of minor children) in order to get funds released to pay the child's tax obligation and my fee. You must present evidence to get funds released. The Court will allow medical bills to be paid but to the provider of the services.

IF that is the case in this situation, I agree with you 100%.

However, you are assuming things that were not said in the original post.

#2 I don't think the "principle" is the same. The education issue is statutory. See §25A(g). There is no statutory provision for child's money, gifted to mom, then used to pay child's medical expenses so mom can take a tax deduction. IMO, still substance over form.

Again, I agree with you, except the principle IS the same. Take that out and your comment is correct. The reason the education thing works is because it is statutory. The principle may be the same, but that does not always mean it is correct, since principles are often contradictory in tax law.

On the other hand, I haven’t seen any citations that say you can’t do it.

[New York Enrolled Agent]

Bees

You wrote: "However, you are assuming things that were not said in the original post."

The only assumption I'm making is the original poster used the correct words to describe the mother's situation. I assume Carol did so. I base my subsequent posts on the fact that the word "conservator" is a legal term.

In Barron's Law Dictionary (written by Steven Gifis) the word is defined as follows.

Conservator - court-appointed custodian of property belonging to a person determined to be unable to properly manage his property. Uniform Probate Code §5-401(c). The term is sometimes used interchangeablyy with guardian or committee.

Thus, it appears reasonable to me to infer from the original post that there was a Court intervention.

[Bees Knees]

Thus, it appears reasonable to me to infer from the original post that there was a Court intervention.

IF the mother has to account to the Court for money spent and has strict guidelines as to how to spend it, I will agree with you. If this is a loose arrangement similar to child support where mom takes money earmarked for child and has the freedom to do just about anything she wants with it, I will stand by my original comment. Maybe EA Carol can clarify this and say whether mother has to periodically account to the court for expenses paid.

[Golden Rocket]

Clash of the Titans!

NYEA sends out a scantily-clad girl holding a card up that says "ROUND 7"

BK, shaking off an early haymaker, plans to lay the conclusive blow with his patented "Minnesota cross".

I love it!

G Rocket


Nothing can be made foolproof for a sufficiently talented fool. -- Outwest

[EA Carol]

Thank you to everyone on this board. You are great. I had to wait till Monday to call my client and ask her these questions.

The money paid for the medical expense is paid by check that has both the child's name and the mother's name and comes directly out of the child's brokerage account. The mother is supposed to report to the court for their OK if she spends more than $500 on the child's behalf. In this instance she didn't, however all the expenses will be reviewed once a year by the court. When she last met with the judge, he told her that certain expenses are definitely the parent's responsibiliy like private schools and should not come out of the child's account.

So my next question is. Can a minor child give a gift of money to a parent?
If the child does give a gift of money to the parent and she puts that money into her account who is to say which money got spent on medical bills?
Since the child is paying tax on the account at the parents rate doesn't the parent get some benefit?
Does all of this stem from the Jackie Coogan law that tried to prevent parents from spending the child's money?
And on the same vein is there any deduction to either the child or the parent for the conservator fees and legal fees paid out of the child's account to maintain this account .

Again thanks for all your help and the great discussion.

[Golden Rocket]

I'm a-gonna try

to answer your questions, Carol. Bees Knees and NYEA have already entered the thread and I can promise you either of these will be more reliable than my answers.

Can a minor child give a gift of money to a parent?
GR: I believe the general answer is "yes" but I'm not sure whether the complexion changes if this is a "boomerang" gift.

If the child does give a gift of money to the parent and she puts that money into her account who is to say which money got spent on medical bills?
GR: The bank account records say who actually gets the money, if you can assume the payee is the recipient (and not a surrogate or conduit for someone else). All the activity in the account is documented by the bank in case the accountholder loses the records. A more credible set of records would be receipts from the recipient, as this not only identifies the recipient but also the purpose.

Since the child is paying tax on the account at the parents rate doesn't the parent get some benefit?
GR: Not a straight answer here, Carol. There should not be a "double" benefit -- i.e. only one such deduction for the same money spent, ostensibly by the party actually paying the money and the party claiming the child as a dependent. If these two are not the same party, there is a problem. Establishment of a trust from the beginning would have eliminated the tax at the parents' rate.

Does all of this stem from the Jackie Coogan law that tried to prevent parents from spending the child's money?
GR: Don't know, but I doubt it. The tax law most likely evolved separately from a law to enable the aggrieved to recover principle. Doesn't matter.

And on the same vein is there any deduction to either the child or the parent for the conservator fees and legal fees paid out of the child's account to maintain this account .
GR: Yes. Unfortunately, I believe these fees would fall into the "Miscellaneous" category subject to the 2% floor.

Remember also that these circumstances might be those which require the child to itemize deductions (i.e. the standard deduction is unavailable).

Good luck on this. Golden Rocket

[Bees Knees]

So my next question is. Can a minor child give a gift of money to a parent?

Don't know.

It depends upon the restrictions placed upon the funds by the court. Is this a trust account with the child as beneficiary and mom as trustee? Is it a joint account between mom and child? Why is mother's name on the account? Is she just a signer, or is she the trustee, or does she have joint tenancy with the child?

There is nothing in the tax law that would prevent a gift between minor child and mother. In order for mom to be able to deduct medical expenses, it has to be from her funds. So if she is not a joint tenant, or if the court says the child cannot gift her the money, then she can't take a deduction for the medical expenses. It appears to me that mom has limited access to the funds and has to account to the court how they are spent, indicating the gifting thing isn't going to work in this case.

[Uncle Sam]

Itemized Deduction

The question - can child gift to parent?

Interesting question.

I had a situation crop up a few years ago - but not the same situation as this.

In New York State, taxpayers are able to take a subtraction modification from Federal AGI for contributions to Section 529 plans (up to $ 10,000 max on a joint return).

I had a situation where the custodial parent of both minor childrens' taxable mutual fund accounts completely liquidated the accounts, then transferred 100% of the proceeds to open a 529 account for each child - and wanted to take the NYS deduction.

I had to contemplate over this before I took the deduction - and the only way I was able to justify it was by considering that there's nothing to stop a minor child from "gifting" proceeds from his custodial account to the parent.

Do you think the client called me during the year to ask about this?

It turns out to be the same client who does a refi on a residential real estate rental property, and includes a home equity line of credit for his personal residence on the refi and expects 100% interest deduction.