Deducting Caregiver expenses

Lillian Baral, a resident of Queens, New York, died at the age of 92. Prior to her death, her doctor diagnosed that she suffered from Alzheimer’s disease or dementia. A hospitalization in 2004 showed she had not been compliant in taking her medications properly and a plan of care was called for to determine whether it was safe for her to live at home alone. A medical summary from 2006 showed that Lillian’s ability to communicate orally was impaired, she was confused, she required assistance with activities of daily living, she required supervisions due to memory deficit, she was at risk or falling and she required baseline homecare services. Lillian’s doctor found that she needed 24 hour supervision and assistance.

Lillian’s brother (Mr. Baral) contracted with a company recommended by Lillian’s doctor to provide services for Lillian. Later, to reduce expenses, Mr. Baral terminated the company’s employment and directly hired one of the caregivers (Pzeverski) that had been working with Lillian. A second caregiver (Jakuboski) was also hired. During 2007, the caregivers were paid $40,760 and $8,820 respectively. They were also reimbursed $4,716 and $850 for expenses, respectively.

Mr. Baral managed his sister’s finances. Lillian had 2007 income from various sources which equaled or exceeded $94,229; this included distributions from IRAs and pensions. No income tax return was filed for 2007 and no taxes were paid. Later, Mr. Baral filed a substitute for return pursuant to section 6020(b) on the basis of information provided by third parties.

On November 9, 2009, the IRS sent Mr. Baral (on behalf of Lillian who died in 2008) a notice of deficiency for 2007. The IRS took the position that Lillian had taxable income of $94,229, that she was entitled to a personal exemption of $3,400 plus a standard deduction of $6,650. The IRS calculated a tax deficiency of $17,681.

When the tax court examined this case, it found that the expenses reimbursed to Pzevorski ($4,716) and Jakubowski ($850) were not deductible because Mr. Baral did not provide the receipts to the court; because the receipts were not provided, they could not be substantiated as relating to medical care. The implication was that if the receipts had been provided then they probably would have been deductible.

The court then examined whether payments totaling $49,580 made to Pzevorski and Jakubowski were deductible. Significantly, neither Pzevorski nor Jakubowski were licensed healthcare providers. Thus, they were not deductible as medical expenses per se because the providers were not licensed. HOWEVER, the court found that payments to them could be deducted if their services qualified as “long-term care services” as defined in Section 7702B(c) of the tax code.

After analyzing the tax code, the Court found that the care Pzevorski and Jakubowski provided constituted “maintenance or personal care services” for a “chronically ill individual” provided pursuant to a “plan of care prescribed by a licensed health care professional.” Thus, Lillian could deduct $43,273 of the payments made to Pzevorski and Jakubowski (the amount paid which exceeded 7.5% of her adjusted gross income).

See Estate of Lillian Baral v. Commissioner, decided July 5, 2011.

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