By John Stambaugh

Commentary



Most folks are aware certain medical expenses can be tax deductible. Doctor, dentist and hospital expenses come to mind. But what most folks don’t know about how the tax law defines medical expenses can make them sick.

Let’s look at what Delbert and Margaret Baker succeeded at doing in U.S. Tax Court in order to justify the deduction of part of their monthly fees to a life care residential facility.

In December 1989 Delbert and Margaret chose a 1,427-square-foot, two bedroom, two bathroom, duplex in the independent living unit of Village West life care facility. Village West is in a retirement community on 153 acres of land in Riverside, Calif.

They paid $130,015 as a one-time entrance fee and agreed to monthly service fees of $1,418 that would increase annually. On their 1989 tax return they deducted $34,541 of the entrance fee as a medical expense.

At issue in U.S. Tax Court was how much of their 1997 and 1998 monthly service fees, which were $2,170 and $2,254, respectively, could be deducted. Before we go any further, let’s look at what they got for their monthly service fee.

The independent living unit duplexes were designed to resemble regular residences and were for normal, independent everyday living. Amenities included emergency-pull-cord systems, complete building and ground maintenance, weekly housekeeping and access to a fitness center.

What enabled them to deduct some of their monthly service fees was Village West provided them with specific information. Village West’s vice president of finance, Charles L. Dalton, prepared a calculation for each year indicating what percentage of monthly service fees would be tax deductible as medical expenses by residents of the independent living units. He computed 17.78 percent and 19.01 percent deductible for 1997 and 1998, respectively.

However, at the same time the Village West resident council established an ad hoc committee. That committee studied the same financial data as Dalton and reported that 40.3 percent and 41.6 percent of the monthly service fees were tax deductible.

Naturally, Delbert and Margaret’s income tax preparer used the higher percentages in computing the amount of their service fees that would be included in their medical expenses as itemized deductions on their 1997 and 1998 tax returns.

The IRS argued in tax court both Dalton’s method and the ad hoc committee’s methodologies in computing the tax deductible percentages were flawed. The IRS stated only an actuarially computed method was proper.

The U.S. Tax Court ruled the tax law does not require an actuarial computation to determine what percentage of the monthly service fees should be tax deductible. It found the higher percentages were based on all the relevant facts and were valid for tax purposes.

The moral of this story is simple: Delbert and Margaret’s life care facility provided information specified how much of their monthly fees would be tax deductible. This means they had more money in their pockets to spend as they saw fit.

The cost of their journey into the sunset of their lives was, at least partially, offset by a tax deduction. In the mind of this tax practitioner it is a fitting legacy.



Stambaugh is a certified public accountant with more than 21 years experience in business tax planning and tax preparation and a master’s degree. He can be reached at 234-2438.