Sunday, February 28, 2010

Tax Help: Turn assistance into gift for best tax outcome

Since the middle of 2007 I have been providing financial and other assistance to a loved one struggling with cancer. She doesn't have any kind of health insurance. We are not related, nor are we co-habitants. In the beginning, the assistance was incidental, but over time it has become substantial.
Though it was instrumental in my having to declare bankruptcy, I do not regret at all my decision to help in this regard. However, my questions now are as follows:
Are any of the health care-related payments I make to her or on her behalf deductible? Is there a way to structure this relationship so that such payments could be deductible?

What would be the criteria necessary for me to issue her a 1099 at the end of the year to cover at least those health-care-related expenses I paid to her or on her behalf and for which she would then be able to deduct on her own tax returns?

Is there any way to get some tax relief in such a situation? — William A., Brentwood

You can generally include medical expenses you pay for yourself, as well as those you pay for someone who was your spouse or your dependent either when the services were provided or when you paid for them.

A person qualifies as your dependent for purposes of the medical expense deduction if they are both 1) a qualifying child and a qualifying relative, and 2) they were a U.S. citizen or national or a resident of the U.S.

A qualifying relative can be any person (other than a spouse) who you lived with all year as a member of your household if your relationship did not violate local law, and whom you provided half of the support for the year. Keep in mind, medical expenses are itemized deductions and you can only deduct the amount of medical expenses that exceed 7.5 percent of your adjusted gross income.

An alternative would be for you to gift the money to her, and she subsequently pays the medical expenses from the gifted funds. She would then be able to claim the medical expenses on her personal return. You, however, may be subject to federal and state gift taxes, or at a minimum, filing annual gift tax returns.

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