Taxpayer May Deduct Medical Expenses and Real Estate Taxes Paid by Another

The United States Tax Court rules in a Memo that a taxpayer is allowed to deduct medical expenses and real estate taxes that her mother, who was not legally obligated to do so, paid directly to medical providers and the city government. Lang v. Commissioner of Internal Revenue (T.C. Memo 2010-286, Dec. 30, 2010).

Judith Lang filed a timely 2006 federal income tax return with a $27,776 itemized deduction for medical expenses and a $6,840 deduction for real estate taxes, among other deductions. Ms. Lang was an adult and was not listed as a dependent on anyone’s tax return. The Internal Revenue Service issued a notice of deficiency after it determined that Ms. Lang’s mother had paid $24,559 of Ms. Lang’s medical expenses directly to her medical providers and $5,508 of Ms. Lang’s real estate bill directly to the city. Ms. Lang filed an appeal with the United States Tax Court.

In the ensuing proceeding, the IRS took the position that Ms. Lang could not deduct the payments that were made by her mother because the funds used to make the payments were not hers. Ms. Lang argued that although her mother paid the bills directly, the payments should be treated first as a gift to Ms. Lang and then a subsequent payment of her own expenses.

The United States Tax Court issues a Tax Court Memo allowing Ms. Lang to fully deduct the medical expenses and real estate taxes. Discussing the medical expenses, the court notes that although the direct payment of medical expenses does not incur gift tax, Ms. Lang’s mother made the payments with donative intent, and therefore “[a]pplying substance over form, we treat [Ms. Lang] as having received from her mother a gift of $24,559 with which [she] paid her own medical expenses.” The court points out that the direct payment of real estate taxes is a taxable gift, and it applies the same “substance over form” rationale to allow the full deduction of taxes. The court also explains that “there is no danger of a ‘double deduction’ arising from our decision on this issue . . . [b]ecause the real estate tax was imposed upon [Ms. Lang], she is the only taxpayer who may deduct it.”

Remember, that load of laundry isn’t going anywhere. Setting it aside for one day may be necessary for you to be the best parent and caregiver that you can be. Rejuvenate and enjoy some one on one time with your child. You’ll be glad that you did.

For the full text of this decision, go to: http://www.ustaxcourt.gov/InOpHistoric/La5ng.TCM.WPD.pdf