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Conversation about... Medical Expenses
The following is an edited excerpt of an email sent to an actual client of the firm. This is not intended to be specific advice; it is only included to give you perspective on the way we communicate with clients regarding various planning and investing topics.

I am so pleased that you called with this question about your father’s medical expenses.

Yes, he can deduct expenses related to his care on his taxes even though they aren’t being delivered by skilled professionals. The reason is this: Your father would meet the requirements detailed in IRS Publication 502 regarding long-term care of a chronically ill person. (You can find this publication at www.irs.gov or let me know and I will send it to you.) As a result, the costs of his wheelchair ramp, of providing help at home for his care, of his medicines and even of his diapers are deductible.

So how does this deduction help your family? Well, your father has a relatively modest income of only $60,000 which today consists of interest income, IRA income required by distribution laws, and Social Security, some of which is not taxable. According to your estimates, the cost for his care this year will be $100,000. So, clearly, you have more in medical expenses than you do in income. What if we were to draw an extra $40,000 out of the IRA? Now your father’s income will be $100,000 and his expenses are $100,000. Does that mean he will pay no taxes? Not quite, but we are definitely doing better than before. The reason the answer is “not quite” has to do with the rule that does not allow you to deduct medical expenses except to the extent that they exceed 7.5% of your income. 7.5% of $100,000 is $7,500 and we know medical expenses will exceed that number by $92,500. So you can use $92,500 of medical expense deductions against $100,000 of income, thus reporting net income of only $7,500 before other deductions like property taxes and charitable gifts. He could very well end up owing no taxes whatsoever!

What have we done? We have removed $40,000 from the IRA with almost no income-tax consequences. Because you were eventually going to inherit that IRA and pay tax at your very high rate, it is better to fund the extra expenses from his IRA rather than for you to pay them. Thus we have done a very wise thing!

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