While I was away at the Annual Meeting of the American College of Trust & Estate Counsel (“ACTEC”) in Maui (tough duty, I know!), we have switched over to Daylight Savings Time and inched ever-closer to April 15, the date on which many of our clients will wait to file their federal and state income tax returns.
With income tax season upon us, you may receive inquiries from your clients regarding the deductibility of expenses incurred for the benefit of a person with special needs. Many such expenses may constitute deductible “medical expenses” under I.R.C. Section 213(d)(1)(A) (and the regulations thereunder) if they relate to the “diagnosis, cure, mitigation, treatment or prevention of disease,” or the costs of treatments “affecting any structure or function of the body.” This definition would include the following:
(1) Premiums for health and medical insurance, amounts paid for qualified long-term care services, and limited amounts paid for a qualified long-term care insurance contract.
(2) Prescribed medicine and drugs.
(3) The costs of transportation to obtain medical care, and the travel costs of a companion for a person who cannot travel alone.
(4) The cost of rendering a vehicle wheelchair accessible.
(5) Medically necessary caregiver services, even if not rendered by a licensed medical professional, as long as the services are of a type generally performed by a nurse.
(6) Certain long-term care services for the “chronically ill,” as defined in IRC § 7702B(c)(2). Payments to family members for long-term care services are not deductible unless the person is a “licensed professional with respect to such service.”
(7) Meals and lodging for a caregiver rendering nursing or long-term care services.
(8) The cost of care in an assisted living facility, nursing home or other institution (including meals and lodging), if the principal reason for the placement is to obtain medical care.
(9) The entire cost of a skilled nursing home facility.
(10) The costs of living in a transitional group residence pursuant to the recommendation of a psychiatrist.
(11) The costs of a special education school that trains a child to overcome learning disabilities, including tuition, meals and lodging, if recommended by a doctor and if the principal reason for attending the school is to overcome the child’s learning disabilities.
(12) Doctor recommended tutoring by a teacher who is specially trained and qualified to work with children who have learning disabilities caused by mental or physical impairments.
(13) Admission and travel to medical conferences that address the illness or condition of the patient.
(14) The costs of maintaining medically necessary special equipment.
(15) The cost of special equipment installed in a home, or improvements made for medical purposes (deductible only to the extent that the reasonable cost exceeds the increased value of the property, if any, that results from the improvement), including entrance and exit ramps; widening doorways; installing railings or support bars; installing lifts; modifying stairways; grading the property to provide ready wheelchair access to the residence.
If a first-party Special Needs Trust is a “grantor trust” with respect to the beneficiary (usually under I.R.C. Section 677(a)(1) and (2), or sometimes one of the other grantor trust “strings,” e.g. I.R.C. Sections 674 or 675(4)(C)) and the Trustee uses SNT assets to pay the beneficiary’s medical expenses, then the taxable income reportable by the beneficiary on his personal income tax return may be offset by those SNT-funded medical expenses if they exceed 7.5% of the beneficiary’s Adjusted Gross Income (10% of AGI for 2013 and subsequent tax years).
In contrast, if the Trustee of a non-grantor SNT (i.e. most inter vivos third-party SNTs) makes such disbursements for the beneficiary’s medical expenses, the SNT may not deduct them as medical expenses. However, the SNT may be entitled to a distribution deduction under I.R.C. Sections 651 and 661 (and a corresponding amount would constitute income to the beneficiary reportable on his individual income tax return).
For more examples of deductible medical expenses, consult IRS Publication 502, “Medical and Dental Expenses” – available at www.IRS.gov/pub/irs-pdf/p502.pdf
Kristen M. Lewis, Esq., Member of the Special Needs Alliance and Fellow of the American Academy of Trust and Estate Counsel.
