Documentation Needed for Medical-Expense Deduction

I read with great interest your monthly column. Recently, you had a question regarding the legality of a medical-expense deduction for a nurse providing care to a paralyzed wife. In my situation, I have a son who has been diagnosed with a learning disability and, therefore, requires special and very expensive private schooling and extra tutoring. Does this private schooling and extra tutoring constitute a tax-deductible medical expense, and if so, what documentation is needed to prove this deduc

Charles Blair, DDS and John McGill, MBA, CPA, JD

Question:

I read with great interest your monthly column. Recently, you had a question regarding the legality of a medical-expense deduction for a nurse providing care to a paralyzed wife. In my situation, I have a son who has been diagnosed with a learning disability and, therefore, requires special and very expensive private schooling and extra tutoring. Does this private schooling and extra tutoring constitute a tax-deductible medical expense, and if so, what documentation is needed to prove this deduction?

Answer:

To qualify as a deductible medical expense under Section 213 of the Internal Revenue Code, the special school must be for a mentally- or physically-handicapped individual. In your particular situation, your son`s condition is such that the resources of the institution for alleviating such mental or physical handicap are a principal reason for his presence there. Under Treasury Regulation 1.213(a), the cost of medical care includes the cost of attending a special school designed to compensate for or overcome a physical handicap, in order to qualify the individual for future normal education or for normal living. Similarly, the cost of care and supervision, or of treatment and training, of a mentally-retarded or physically-handicapped individual at an institution is within the meaning of the term "medical care."

In order to properly document this, you will need to furnish the name and address of each person to whom payment for medical expenses was made and the amount and date of each payment.

Question:

An article in your August 1995 Blair/McGill Advisory newsletter concerned the tax benefits related to the Americans With Disabilities Act (ADA). You suggest amending tax returns for qualifying equipment purchased since November 1990. Since we elected to recover the cost of the equipment under Section 179 of the IRS Code, do we now need IRS approval to change that election and refile using the ADA credit? My accountant says yes. We would appreciate your opinion. I`m sure others find themselves in a similar position.

Answer:

Under Section 179(c)(2) of the Internal Revenue Code, once the due date (or extension date) of the return has passed, the Section 179 expense election is irrevocable, except with IRS consent. In addition, the IRS will grant consent only in extraordinary circumstances.

Requests for consent must be filed with the IRS in Washington, D. C. A request, which must be signed by the taxpayer or his/her representative, must be accompanies by a statement showing the tax year and the property involved, and must set forth in detail the reasons for the request. Requests for consent also are subject to user fees.

Question:

My wife and I separated during 1995. Later in that year, we sold our personal residence that was owned jointly for $150,000. As part of the marital settlement, my wife received all of the cash from the sale of the house. If we each wished to purchase another residence to roll over the gain from the sale, how much should be spent on the new residences?

Answer:

Since you owned the house jointly at the time of the sale, each of you is allocated half of the sales price. Therefore, each spouse must purchase a new residence with a cost of at least $75,000 to avoid reporting any gain from the sale of the house. How the cash from the sale of your former residence was distributed between the two of you makes no difference.

If you had known in advance that your wife would receive all of the cash from the sale of the property, you would have been well-advised to transfer title of the house to her as part of the property settlement prior to the sale. That way, if you were unable to reinvest in a new residence, you would not have to share the tax liability arising from the sale of your former residence, in which you did not share the proceeds.

Question:

I am planning on getting remarried this summer. My future wife plans to sell her condo and move into my townhouse. By the end of the summer, I want to sell my townhouse because we will be buying a home near my practice. Is there some way we both can avoid paying taxes on the gain from the sale of our personal residences?

Answer:

Good news! Both you and your spouse can utilize the provisions of Section 1034 of the Internal Revenue Code of 1986 to roll over the gain from the sale of your two principal residences. To qualify, the purchase price of the replacement home must equal or exceed the total sales price of the condominium and townhouse. If the condo sells for $150,000 and the townhouse sells for $125,000, all or part of the gain will be taxed unless your joint replacement home costs at least $275,000.

Furthermore, the purchase of this qualifying residence must take place within 24 months, either before or after the sale of your current residences. For further details on qualifying, be sure to consult your tax adviser.

Dr. Blair is a nationally-known consultant and lecturer. McGill is a tax attorney and MBA. They are the editors of the Blair/McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes and protect assets. The newsletter ($130 a year) and consulting information are available from Blair/McGill and Company 4601 CharlottePark Drive, Suite 230, Charlotte, NC 28217, phone (704) 523-5882.

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