As part of the 2020 Tax Update and Review Conference Virtual Conference series, we field questions from our students throughout the presentation. We have highlighted some of the common questions and the answers you might find valuable.
Lesson 7 covers Standard deduction, unusual medical, taxes, SALT, home mortgage interest, home refinance issues, points, investment interest, contributions, and miscellaneous deductions.
QUESTION: Is there a limitation for how many properties you can deduct property taxes for? (e.g. 1st home, investment property, vacation home, 2nd home?)
ANSWER: There is no limit on the properties you can deduct taxes for. But of course, there is that overall $10,000 itemized deduction limit on all taxes.
QUESTION: Son and daughter inherited rental property (4-plex) from parents 20 years ago on a 50/50 split. If son buys out sister's half, does property assessment remain the same per Prop 13?
ANSWER: I believe Prop 13 dealt with replacing personal residences and inheritances from parents. With one child is selling to another, I don’t believe that would count under Prop 13. Plus, we just had Prop 19 pass in the November election, and it becomes effective at various times during 2021. I don’t see provisions for transfers between siblings. So, I believe the purchased portion would be reassessed. Although I am not well versed in property assessments.
QUESTION: Taxpayer has been living in a nursing facility, has a private room, gets meals, but does not really have medical treatments---just for old age--for ten years. She is 88 years old. Are payments a medical expense? She never has claimed them.
ANSWER: This is a tough question. Medical expenses include amounts paid for the cost of inpatient care at a hospital or similar institution if the main reason for being there is to receive medical care. This includes amounts paid for meals and lodging. I think you should investigate a little more and see if she is there because she needs supervision or can’t live independently. I would think if she didn’t need some form of care, she would be living in a retirement home not a nursing facility. I have included the following tax court case where even some of the expenses of a retirement home counted as medical.
Allocation of retirement residence fees to resident's medical expenses - Delbert L. Baker, (2004) 122 TC - The Tax Court has approved the use of the percentage method for determining what portion of monthly fees paid by a taxpayer to a continuing care retirement community qualified as deductible medical expenses. In doing so, the Tax Court rejected IRS's contention that the deductible amount had to be determined based on an actuarial analysis taking into account life expectancy and health care level expectancy. But no deduction was allowed for costs related to use of the pool and spa at the facility.
QUESTION: Medical expenses of a surrogate mother who carried the child? What if in a foreign country?
ANSWER - As with in vitro fertilization, this issue is not specifically addressed in the Code, Regs, etc. The Code does tell us that medical expenses are only deductible for the taxpayer, spouse and dependents. The definition of a dependent for medical purposes ignores the gross income and joint return tests. Therefore, it appears that a surrogate mother’s medical expenses can only be deducted if she qualifies as a “medical dependent.” The unborn fetus is not a dependent until actually born. So, it makes no difference whether the surrogate is a resident or non-resident, she would have to be the taxpayer’s medical dependent in order for the taxpayer to to deduct the surrogate mother’s expenses. Plus, the surrogate is generally paid and therefore would not be a medical dependent. Bottom line, it is rare that the expense of a surrogate would be deductible.
QUESTION: How about inherited property from parent’s home couches.....dishes....crystal given to charity is valued at $2000. What would substantiation look like?
ANSWER: That is a tough one. If a home is inherited it would have to be appraised. Technically the same would be true of anything else that is inherited. How did you come up with a nice round $2,000? Obviously, the cost of an appraisal would probably be more than the tax benefit. There are charities out there that will provide an appraisal. All that may be more than a client is willing to go through. So, settle for $249?
QUESTION: .07.08.08 says you need an appraisal for "similar items" if aggregate over the year is over $5000. If the items make up various household items, clothing, etc. are those all considered "similar"?
ANSWER: Similar items of property means property of the same generic category or type, such as stamp collections (including philatelic supplies and books on stamp collecting), coin collections (including numismatic supplies and books on coin collecting), lithographs, paintings, photographs, books, non publicly traded stock, non publicly traded securities other than non publicly traded stock, land, buildings, clothing, jewelry, furniture, electronic equipment, household appliances, toys, everyday kitchenware, china, crystal, or silver (Reg § 1.170A-13(c)(7)(iii)).
QUESTION: Self-employed paying for extra insurance for parent (PPO). Deductible on face of return?
ANSWER: A self-employed individual (or a partner or a more-than-2%-shareholder of an S corporation) can deduct as an above-the-line expense 100% of the amount paid during the tax year for medical insurance on behalf of himself, his spouse and his dependents subject to the following requirements (Code Sec. 162(l)(1)(B)): So, the parent would have to be a dependent.
QUESTION: What if someone has a property acquired prior to 12/15/17 and acquires a second home after? Please advise on the limit to use.
ANSWER: Well first of all, the existing home mortgage is grandfathered in up to $1M limit. However, the limit after 12/15/17 is $750K which would include any grandfathered debt.
Example #1 – If the grandfathered debt is $800K then no additional debt would be qualified after 12/15/17 ($750K - $800K).
Example #2 - If the grandfathered debt, for example is $400K then an additional debt of $350K ($750K - $400K) qualified debt.
QUESTION: What if you already made an unsecured election prior to TCJA?
ANSWER: The election is irrevocable without IRS consent. (Reg. 1.163-10T(o)(5)). So once made it continues to apply.
QUESTION: Medical expenses - are supplements recommended by a doctor as an alternative cancer treatment deductible? (When the taxpayer undergoes ONLY alternative treatments) What about certain medical devices, such as single infrared sauna, infrared biomat? Thank you!!!
ANSWER: If the doctor prescribes the use of the biomat then it would be a taxable deduction as would the supplements. As for an infrared sauna, if is the permanent variety installed in the home, then special rules apply. Amounts paid for special equipment installed in the home, or for improvements may be included in medical expenses, if their main purpose is medical care for the taxpayer, the spouse, or a dependent. The cost of permanent improvements that increase the value of the property may be partly included as a medical expense. The cost of the improvement is reduced by the increase in the value of the property. The difference is a medical expense. If the value of the property is not increased by the improvement, the entire cost is included as a medical expense. This may require an appraisal of the home with and without the sauna to determine the deductible portion. If audited an auditor would surely question the deductibility so make sure your client retains documentation of the Doctor’s prescription and the more difficult documentation of how the portion of the sauna was determined.
QUESTION: Contributions rules for donations to Armenia? If allowed at all?
ANSWER: Generally, deductible contributions to foreign charities are not permitted. However, do not mistake U.S. Charities that do charitable work in foreign countries as foreign charities. So, to make deductible donations for Armenian relief one would have to find a U.S. Charity that supports Armenian relief.
QUESTION: Is an IRS Agent a “Public Safety Officer”?
ANSWER: I wasn’t sure if you were kidding or not... But anyway, here is the definition of a public safety officer: A public safety officer is an individual serving a public agency in an official capacity, with or without compensation, as a law enforcement officer, a firefighter, a chaplain, or as a member of a rescue squad or ambulance crew.
QUESTION: Are the charitable expenses such as meals, entertainment, uniforms, etc. still subject to the tier 2 subject to 2% of AGI, not a charitable deduction?
ANSWER: They have always been deductible as a charitable contribution, never as a Tier 2 itemized. The meals are allowed in full (no 50% haircut).
QUESTION: If you purchased a home in 2015 - $1,100,000/$900,000 loan - and then refinanced in 2020 and replenish your remodeling cost of 100,000. New loan $900,000. Is this allowed?
ANSWER: Several issues here…
- The interest on the amortized loan balance (but not exceeding $1 Million) of a pre-TCJA loan continues to be deductible.
- Any amount of the refinance in excess of $750K would not be qualified home mortgage interest. So, in this case the interest on the extra $100K would not be deductible.
- Even though the term on the new loan is probably extended, for refinanced loans the term become the term of the original loan. Example: Old loan was a 30-year term but was refinanced after 20 years. The refi loan has a term of 30 years. The interest on the refi loan is only deductible for 20 years.
QUESTION: There is a college in San Jose that you have to be 18 to attend and mentally deficient such as Downs. They use the arts to teach these kids. Some of the kids are really gifted. For almost all of them, this college is the first time in their lives they have been complimented on work they have done. I actually have two paintings done by two different students and the paintings are really good. I was just wondering if the tuition there would count as medical. This college is providing a service not available elsewhere and it is helping the kids develop.
ANSWER: This is tough one and what court cases are made from. What is interesting, is the college an accredited public, nonprofit, or proprietary post-secondary institution eligible to participate in the student aid programs administered by the Department of Education? If so, the education would qualify for the education credits. If not, you could make the case it is a “special school” for mentally impaired students. To that end I researched this a little and found the pertinent regulation along with some court cases. You will note that all of the court cases focused on the term “special school”. From what you have indicated this school may be a special school. But that determination is yours. Really hope this helps. Looks like it may be a borderline call.
Reg Sec 1.213-1(e)(1)(v)(a) - Where an individual is in an institution because his condition is such that the availability of medical care (as defined in subdivisions (i) and (ii) of this subparagraph) in such institution is a principal reason for his presence there, and meals and lodging are furnished as a necessary incident to such care, the entire cost of medical care and meals and lodging at the institution, which are furnished while the individual requires continual medical care, shall constitute an expense for medical care. For example, medical care includes the entire cost of institutional care for a person who is mentally ill and unsafe when left alone. While ordinary education is not medical care, the cost of medical care includes the cost of attending a special school for a mentally or physically handicapped individual, if his condition is such that the resources of the institution for alleviating such mental or physical handicap are a principal reason for his presence there. In such a case, the cost of attending such a special school will include the cost of meals and lodging, if supplied, and the cost of ordinary education furnished which is incidental to the special services furnished by the school. Thus, the cost of medical care includes the cost of attending a special school designed to compensate for or overcome a physical handicap, in order to qualify the individual for future normal education or for normal living, such as a school for the teaching of braille or lip reading. Similarly, the cost of care and supervision, or of treatment and training, of a mentally retarded or physically handicapped individual at an institution is within the meaning of the term “medical care”.
Walton, TC Memo 1982-648 — Definition of medical care—cost of special education and training. Medical expenses deduction denied for private school tuition and cost of tutor. School wasn't “special school” and tutor didn't have any specialized training for dealing with emotionally disturbed students. Taxpayers' daughter, who suffered from emotional stress and had academic trouble in public schools, was sent to private school where she excelled. School didn't consider itself to be school for students with handicaps.
Pfeifer, TC Memo 1978-189 - Definition of medical care—cost of special education and training—scope of includible expenses. Deduction denied parents for cost of sending child with learning disabilities to private school; No special program, staff psychologists or psychiatrists, medical services was provided by school. Curriculum was standard college-preparatory; school didn't meet Regs.' definition of “special school.”
Feinberg, TC Memo 1966-145 — Definition of medical care — cost of special education and training. Medical expense deduction denied parents for cost of private schools for son with general physical weakness and speech impairment. Medical resources and services weren't available at schools. Although these private schools helped relieve child's depression, expenses weren't for type of medical care provided by statute.
Glaze, TC Memo 1961-244 —Definition of medical care—cost of special education and training. Deduction denied for tuition paid for attendance of taxpayer's mentally retarded son at military school which provided no special treatment for mentally retarded children. Taxpayer enrolled his son at the military school after the public elementary school had requested the son's withdrawal from school. The withdrawal was requested because of the child's failure to comprehend the material taught and to adjust to the school activities. But the cost of education even for a mentally retarded child is not a deductible medical expense. The taxpayer failed to show that the payments he made were for medical care rather than education, While the military school accepted mentally retarded boys, it provided no special services or treatment for them and the child received none beyond the normal treatment given to all students.
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