Tax Deductions

	TAX DEDUCTION INFORMATION

The World Wide Association of Specialty Programs and Schools does not give tax advice. The following information has been gathered from various sources, and WWASPS does not take responsibility for the accuracy or applicability of this information. It is strongly recommended that parents obtain the advice of a tax accountant before taking the deductions outlined here. MEDICAL EXPENSES I. Definition of Medical Care Under Internal Revenue Code Section 213(a), a taxpayer is allowed to deduct only payments made for the "medical care" of the taxpayer, the taxpayer's spouse, or a dependent. Payments made for medical care include payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body (Sec. 213(d)(1)(A)). In addition, payments for the medical care include payments made for transportation primarily for and essential to medical care described above. These expenses, with proper substantiation, are generally deductible to the extent that it exceeds 7.5% of the taxpayer's adjusted gross income. Expenses merely beneficial to an individual's general health are not considered expenditures for medical care. Income Tax Regulations Sec. 1.213-1(e)(1)(ii). II. In-Patient Care A. Institutions Other Than Hospitals - The deductibility of the cost of care in an institution other than a hospital depends on the condition of the individual, and the nature of the services provided and not on the nature of the institution itself. If an individual is in an institution for the principal reason of obtaining available medical care and meals and lodging are provided as a necessary part of that care, then the entire cost of the stay is a deductible medical expense. Regs. Section 1.213-1(e)(1)(v)(a). B. Special Education Expenses - The cost of attending a special school for mentally or physically handicapped persons is a deductible medical expense if the principal reason for attending the school is to alleviate the person's handicap. The deductible costs of attending such a school include meals, lodging, and the expense for ordinary education furnished by the school which is incidental to the special services performed. Regs. Section 1.213-1(e)(1)(v)(a); Rev. Rul. 58-280, 1958-1 C.B. 157. Certain costs incurred by parents visiting a mentally ill child in a situation where visits are part of the medical treatment for the child are deductible medical expenses. Urbauer v. Comr., T.C. Memo 1992-170. However, the cost of visiting a sick child in situations where the visit is not medically necessary and the parent serves no medical function is not a deductible medical expense. III. Tax Court Case Urbauer v. Commissioner (T.C. Memo 1992-170) A. Background of Case - John Urbauer, the taxpayers' 17-year-old son, experienced severe behavioral problems during 1986 and 1987. In 1987, his parents enrolled John in the DeSisto School for treatment of these problems. DeSisto is a college-preparatory school located in Massachusetts. The curriculum at DeSisto is designed to address both the educational and emotional needs of its students. This institution also uses a multifamily therapy program called "Parent/Child Communication Groups" to treat the emotional needs of its students. On their 1987 Federal income tax return, the parents deducted John's tuition, room, and board at DeSisto as a medical expense under section 213. They also claimed the following as a medical expense deduction: the family's airfare to and from DeSisto; car rental, hotel, meals, and movie expenditures made in connection with these trips to DeSisto; telephone expenditures; membership dues in the Michigan Association for Parents of DeSisto (MAPOD); clothing, toiletries, and jewelry purchased for John while at DeSisto; John's allowance while at DeSisto; and family medical prescription. The IRS allowed petitioners' medical expense amounts paid for John's tuition, room and board. The other expenses were disallowed. B. Tax Court Decision - 1) John's "personal and allowance account": Parents of DeSisto students were required to maintain these accounts. Because of this requirement, these expenses were considered ordinary costs of education and incidental to the special services DeSisto provides. Thus, his parents were entitled to a deduction of these costs under Regulations Sec. 1.213-1(e)(1)(v). 2) Travel and Transportation cost: The parents' participation in John's treatment required their attendance at some therapy sessions. Their travel costs was primarily for and essential to medical care, and they were entitled to deduct these costs. IRC Sec. 213(d)(1). 3) Telephone Calls: John's therapy was also conducted by telephone calls between, John and DeSisto staff. Their telephone expenses were deductible since it was necessary to John's treatment. 4) Lodging: IRC Section 213(d)(2) provides that amounts paid for lodging while away from home, not lavish or extravagant, may only be deducted if the medical care is provided by a physician in a licensed hospital or medical care facility. The parents failed to substantiate where John's therapy sessions were conducted by a therapist or by a psychiatrist. Therefore, they were not entitled to deduct their lodging expenses incurred by reason of John's treatment at DeSisto. 5) Meals: It is well settled that no medical expense deduction is allowed for meal expenses incurred while away from home for medical care. 6) Clothing, toiletries, towels, MAPOD, and movies: The parents provided no evidence that these expenditures were related to John's medical care and was considered as expenses merely for John's general health. Thus, these expenditures were not allowed. 7) Prescription medicines Deductible if the medicine is prescribed by a physician for medical care CASE STUDIES Prepared by Joe F. Akins, CPA, Executive Director of Grace Christian Home for Girls, Shreveport, La. Taxpayers are permitted to deduct expenses incurred for "medical care" of a dependent to the extent that they exceed 7.5% of adjusted gross income (including both husband and wife if joint returns are filed). This memorandum is offered for the purpose of assisting parents and tax advisors in reviewing and understanding the law regarding this matter. The specific facts of each case determine whether the criteria are met for the deductibility of costs incurred. You should consult your tax advisor and obtain an opinion specific to your case as to the deductibility of costs that you incur. Definition of the term "medical care" - The term "medical care" includes amounts paid (A) for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body (including amounts paid for accident or health insurance) [and] (B) for transportation primarily for and essential to medical care. Section 213(e)(1) of the Internal Revenue Code To qualify an expenditure for medical deduction, taxpayers must show that the dependent was afflicted with a mental disease, defect, or illness and that the services received directly or proximately related to the mitigation or treatment of the disease or defect. The legislative history and the regulations make it clear that expenditures for the alleviation of mental, as well as physical, defects or illnesses are to be deductible. A.J. Simms v. Commissioner The extent to which expenses for care in an institution other than a hospital shall constitute medical care is primarily a question of fact which depends upon the condition of the individual and the nature of the services he receives (rather than the nature of the institution). A private establishment which is regularly engaged in providing the types of care or services outlined [herein] shall be considered an institution for purposes of the rules provided herein. Income Tax Regs., sec. 1.213-1(e) General Definitions - Medical care does not depend on the experience, qualification, or title of the person rendering services, but instead it depends on the nature of the services rendered. The Code and the regulations do not require a taxpayer to ascertain whether a practioner is qualified, is authorized under state law, or is licensed to practice, before obtaining his services or claiming a medical expense deduction. Where it can be shown that an individual paid an amount for a purpose defined in the Code as "medical care," such amount qualifies as a medical expense. Rev. Rul. 63-91 Whether an expenditure constitutes medical care depends upon the therapeutic nature to the individual, and not whether the expense in "medical" to all persons. Fischer v. Comissioner [Dec. 28,935], 50 T.C. 164, 194 (1968). The nature of Grace Christian Home - Grace Christian Home is a residential program with a duration of nine to twelve months. Grace Christian Home accepts girls between the ages of 12-17 who have a history of behavioral and/or emotional problems. Girls who are admitted to Grace Christian Home are considered to be hard to control, oppositional, and defiant. Some girls have a history of substance abuse. Others may be sexually promiscuous; may have suffered physical, emotional or sexual abuse; may be suffering mild or moderate depression; may be afflicted with ADHD, etc. No one is accepted into Grace Christian Home who does not exhibit the described behavioral experiences to some degree. The principal reason for enrollment at Grace Christian Home is to utilize its resources to treat or alleviate the behavioral, emotional, and/or addictive conditions presented. Educational services are provided by Grace Christian Academy, which is an affiliate of Grace Christian Home. Educational services are rendered as an incident and component to the overall care rendered. No one is accepted into Grace Christian Home solely, or primarily, for academic purposes. Grace Christian Home meets the needs of the girls in its care and strives to affect permanent change by having the girls participate in a variety of therapeutic experiences. The program is holistic in nature, consisting of several components, including the following: * group counseling * individual counseling * family therapy -- agreement to participate in on-site (or tele/vido conferences if necessary) therapy sessions is required as a condition of admission to Grace Christian Home. * work therapy -- scheduled household chores and an outdoor "workday" * physical/recreational therapy -- regular, scheduled, supervised exercise sessions: gym, track, pool, exercise machines etc. for physical health purposes * group therapy: topical studies -- conducted by staff persons to deal with such matters as substance abuse, self-esteem, communications, co-dependent relationships, decision making, social etiquette etc. * educational therapy -- schooling under the supervision of a certified teacher * social interaction therapy -- supervised by trained staff persons: the process of learning to co-exist successfully with roommates and housemates, to share, to communicate, to contribute to a functioning household * cultural therapy -- a variety of cultural events such as ballet, opera, symphony, community theater, art museums, community fairs etc. to broaden awareness and appreciation of fine arts and cultural diversity. * social skills training -- learning to communicate more effectively, dealing with anger successfully, learning to accept authority, etc. * spiritual therapy Because of the facts stated above Grace Christian Home meets the institutional requirements of the Internal Revenue Code and regulations for providing medical care. Taxpayers who enrolled their son in a college prep school, that addressed the educational and emotional needs of its students, primarily for the purpose of treating his behavior and drug problems, were entitled to deduct tuition, room and board, and other direct costs of care. C.F. Urbauer v. Commissioner Amounts paid to a non-professional individual who helped conduct certain exercises for a mentally retarded child were expenses of medical care. The medical services qualified as medical care even though those who performed the services were not required by law to be, and were not licensed, certified or otherwise qualified to perform the services rendered. The cost incurred qualified as medical care because it was for services given for the purpose of affecting a function of the body and of alleviating physical and mental defects. Rev. Rul. 70-170 Amounts paid by a taxpayer to maintain a dependent for several months in a therapeutic center for drug addicts were held to be deductible medical expenses. The U.S. Supreme Court has held that persons addicted to narcotics "are diseased and proper subjects for [medical] treatment ..." C.O. Linder v. the United States, 268 U.S. 5 (1925) Deductible medical costs (assuming that all criteria for deductibility are met)- * Tuition paid to Grace Christian Home -- The full amount of tuition paid to Grace Christian Home is a deductible medical care expense. * Transportation and lodging - A deduction is allowed for the cost of transportation of the dependent to the facility upon admission, and the cost of her return transportation upon completion of the program. Travel expenses incurred by a parent who is required to accompany a child because of the child's immaturity are deductible. Rev. Rul 58-110 A deduction is allowed for lodging, but not meals, while away from home primarily for and essential to the medical care. This deduction is limited to $50 per person per night. The cost of transportation, lodging or other costs of attending, or participating in family therapy sessions is a medical care expense related to the treatment of the dependent. Grace Christian Home requires, as a condition of enrollment in its program, that families participate in a number of family therapy sessions. C.F. Urbauer v. Commissioner Where an individual is in an institution because his condition is such that the availability of medical care (as defined) 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, constitute an expense for 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. Section 1.213-1(e)(1)(v) of the Income Tax Regs. Other Criteria Required for Deductibility - The taxpayer should have a physician, substance abuse counselor, or other professional person evaluate your daughter and render a diagnosis of her condition, and render an opinion that her diagnosis would probably be improved by her admission into a program such as Grace Christian Home. In order to claim a medical expense deduction for tuition paid to a private school for their son the taxpayers had to prove the direct relationship between the tuition paid and an objective contemplated by the definition of medical care, and that it was paid to accomplish that purpose. Certain criteria for determining this issue have been developed in [previous cases], including among which are the principle purpose for which the expenditure was made, whether it was made on the advice of a physician, whether the expenditure had a direct relationship to the treatment of a specific disease or a physical or mental condition, and whether the treatment could reasonably be expected to effect the diagnosis, cure, mitigation or prevention of a specific disease. E.F. Glaze v. Commissioner The four principal questions raised in Glaze were: 1. was the principal purpose of the expenditures for "medical" reasons, as defined 2. were the expenditures made on the advice of a physician 3. do the expenditures directly relate to the treatment 4. could the treatment reasonable be expected to be effective. Year of Deductibility - In general, medical care expenses are deductible in the year paid, except that payments made in advance are deductible when the services are rendered. Sources Quoted and Other References - * Internal Revenue Code Sec. 213(e)(1) * Sec. 1.123-1(e), Income Tax Regulations * Rev. Ruling 63-91 * Rev. Ruling 63-273 * Rev. Ruling 70-170 * Rev. Ruling 72-226 * Rev. Ruling 73-325 * E. F. Glaze, 20 TCM 1276, Dec. 25,004(M) TC Memo. 1961-244 * A. J. Simms, 39 TCM 700, Dec. 36,493(M), TC Memo. 1979-499 * C. F. Urbauer, 63 TCM 2492, Dec. 48,094(M), TC MEMO. 1992-170 * CCH Standard Federal Tax Reports * CCH 1998 U.S. Master Tax Guide This memorandum was prepared by Joe F. Akins, a Certified Public Accountant in private pratice. Joe is also the founder and executive director of Grace Christian Home for Girls. This memorandum was prepared based on tax laws and principles in effect in 1999. Although there is little change in tax principles relating to the matters discussed, you may wish to consult your tax advisor, or the author at the email address noted, to determine whether any changes in fact have occured.
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