Taxes & Your Money-Caregiver tax deductions

Source for this case summary - The AICPA Journal of Accountancy

The Tax Court held that payments made to an elderly woman’s caregivers for personal care that she required due to her diminished capacity qualified as long-term-care services and were therefore deductible under IRC § 213(d)(1)(C) (Estate of Baral, 137 TC no. 1 (2011)).

Lillian Baral was diagnosed by her physician as suffering from dementia, and the physician determined that she required 24-hour assistance and supervision for medical reasons. Her brother (who handled Baral’s financial affairs under a power of attorney) hired two individuals to provide that care and paid them $49,580 for their services in 2007. He also reimbursed them $5,566 for supplies they purchased.

Baral did not file an income tax return for 2007, so the IRS prepared a substitute return for her, under the provisions of section 6020(b). The IRS determined that she had income of $94,229 for the year, and, after her personal exemption and standard deduction, it determined she had an income tax deficiency of $17,681 for the year. Baral died in 2008, and her estate sued to have the amounts paid for her long-term care and supplies, as well as $760 paid to her physician, allowed as medical expense deductions for 2007.

Amounts paid for qualified long-term-care services are deductible as medical expenses under section 213(d)(1). Qualified long-term-care services include personal care services required by a chronically ill individual and provided pursuant to a plan of care prescribed by a licensed physician (IRC § 7702B(c)(1)).

The Tax Court held that Baral qualified as a chronically ill individual under section 7702B(c)(2) because she required substantial supervision to protect her from threats to her health and safety due to her severe cognitive impairment. The court also held that the services provided by the caregivers were necessary maintenance and personal care services that she required because of her diminished capacity and that they were provided pursuant to a care plan prescribed by her physician. Therefore, they were qualified long-term-care services.

The court held that the payments to the caregivers for their services and the payment to the physician both qualified as deductible medical expenses (subject to the 7.5% of AGI threshold).

The payments for supplies did not qualify as deductible medical expenses, the court held, because the estate did not provide receipts to the court or otherwise substantiate that they were for medical care.