Since taxpayers and tax preparers often discuss expenses that cannot be deducted, let’s discuss expenses paid by another person that a taxpayer can deduct. Perhaps this discussion may save you from overpaying your 2014 taxes. It is also one of the rare examples when the tax ruling is logical and makes sense.
In the case of Judith Lang, TC Memo 2010-286, the IRS argued that a daughter could not deduct medical expenses and real estate taxes on her Form 1040 since the expenditures were paid directly by her mother to the medical service providers and local tax authorities. The Tax Court disagreed! The Court found that the mother intended the medical expense payments to be gifts to her daughter. Therefore, the Court characterized the transactions as gifts from the mother to her daughter followed by payment of the medical expenses by the daughter with the gifted funds. Better yet, there is a tax-law exclusion for gifts that are made in the form of direct payments to medical service providers. Thus, there was no gift tax due from the mother.
If the daughter had been a dependent of her mother, the mother would have been entitled to the tax deduction. In this case however, the daughter was not a dependent of the mother, so the deduction for the daughter’s medical expenses belonged to the daughter and not the mother.
The Court applied the same logic to the real estate taxes which allowed the daughter to claim these taxes on her personal income tax return. Although there is no exclusion from the gift tax for the payment of real estate taxes, the amount paid by the mother was less than the annual exclusion. Thus, no gift tax was due with respect to the real estate taxes.
The Internal Revenue Code 2503(e) gift tax exclusion that applies to the medical expenses also applies to tuition (not room & board) expenses (IRC Sec. 2503(e)(2)(A)).
And if you purchase your principal residence and the sales agreement requires that the seller pay points or loan origination fees, you can claim those expenses on your personal income tax return.
To learn more about your personal income tax situation, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation with an experienced tax professional. You can also schedule a consultation at Click Here.
