Medical Deduction for Travel; Transferring Money to a Relative's Account; Placing a Residence in an Irrevocable Trust

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, September 3, 2000.

Copyright 2000  Robert L. Sommers, all rights reserved.

Question: May I deduct travel to and from a pharmacy to obtain my prescription drugs?

Answer: Yes. Transportation expenses for medical care and treatment are deductible expenses. This includes trips to visit doctors, dentists, hospitals, and pharmacies. The expense must be primarily for, and essential to medical care.

You may deduct the actual expense or use the standard mileage deduction of $0.10/mile. In addition, you may deduct parking and toll charges. However, IRS will not permit you to depreciate your vehicle as a medical expense.

Medical expenses also include the cost of travel away from home for medical treatment, including in-route meals and lodging; however, the cost of meals and lodging incurred while receiving medical treatment are usually not deductible.

The U.S. Supreme Court allowed the cost of travel by a heart patient who had been told by his doctor to spend the winter in Florida for general health reasons, but the court treated the expense of the taxpayer’s apartment and meals while in Florida as non-deductible personal expenses.

However, taxpayers who travel away from home to receive medical treatment provided by a physician in a licensed hospital or an equivalent facility may deduct their lodging expenses, capped at $50 per night, so long as there is no significant element of personal pleasure, recreation, or vacation in the travel away from home.

IRS has also ruled that the cost of travel to attend a seminar relating to a dependent’s chronic disease and the seminar expenses were deductible.

Note: The itemized deduction for medical expenses is subject to a floor of 7.5% of your adjusted gross income (AGI). For example, if your AGI is $50,000, then you are entitled to deduct uncompensated medical expenses exceeding $3,750.

Question: I transferred $10,000 to my brother’s online stock brokerage account. This amount has increased to $200,000. Who is taxed on this increase?

Answer: Your brother – when the stock is sold. You made a gift by transferring $10,000 to your brother, without consideration (you received nothing in return), and without any written agreements or understandings that the funds were intended to benefit you. The character of the transaction is determined when you make the transfer, not when stocks are sold.

Because there is no indication that you and your brother formed any kind of joint venture and because your name is not on the account, you are not considered the owner and, thus, the profits and losses belong to him.

Note: Before making such transfers, document your intention as to whether you are making a gift or entering into an investment arrangement (in which case the brokerage account should reflect the change in ownership).

Question: Under my divorce settlement, my residence was placed in an irrevocable trust. My two daughters and I are beneficiaries. I plan to sell the home. Will I qualify for the residency exclusion?

Answer: No. The residency exclusion applies to a taxpayer who has owed and occupied a home for at least 24 months during the 60-month period prior to sale. You transferred your home to an irrevocable trust and it now owns the property. When a trust owns property, the trust is considered the taxpayer, not you. Thus, the exclusion will not apply because you did not own the property. Also, the trust cannot claim the exclusion (as it is not capable of occupying a residence).

The situation is different when you transfer your residence to a revocable living trust (typically used for estate planning) or you are considered the owner of the trust under grantor trust tax rules. In these situations, you would be considered the owner and occupant of the property and, therefore, entitled to the residency exclusion.

In your case, assuming the trust is taxed as a separate entity (not a grantor trust), the trust will pay a recapture tax of 25% federal on any deprecation allowed or allowable on the property, and the remaining gain will be taxed at 20% federal. California does not have a separate capital gains rate. In addition, mortgage interest and real estate tax deductions belong to the trust, not to you.

The lesson: Do not place a principal residence in an irrevocable trust or other separate entity (corporation, limited partnership) without understanding how the residency exclusion operates. Placing your home in a revocable living trust, however, will not cost you the exclusion.

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All contents copyright 1995-2003 Robert L. Sommers, attorney-at-law. All rights reserved. This internet site provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet® is a registered trademark of Robert L. Sommers.