Q. I wasn't able to keep complete records of my Schedule A deduction for ______________, but I was able to estimate the deduction pretty accurately. If I am audited and the deduction is disallowed, how will the US Tax Court decide if I am entitled to the deduction?
A. While the IRS requires a taxpayer to keep sufficient records to establish the amount of a deductible expense, the Courts have been more accepting of human behavior. In 1930, a Federal Court of Appeals established a rule of law known as the "Cohan Rule." This rule is named after George M. Cohan whose case prompted the Court to adopt the rule. The Cohan Rule is still alive and well and applied by the Tax Court as recently as this month.
The Cohan Rule was stated this way in a recent Tax Court opinion: "Generally, when evidence shows that a taxpayer incurred a deductible expense, but the exact amount cannot be determined, the Court may approximate the amount, bearing heavily if it chooses against the taxpayer [because it is the taxpayer's fault that an exact amount cannot be established]. . . . The Court, however, must have some basis upon which an estimate can be made."
I believe the Rule could be used in the following situation. Taxpayer volunteers at her church (or synagogue or mosque) once a week doing office work. Taxpayer has recorded from her car's odometer that it is 13.2 miles from her home to the church (26.4 miles round trip). Taxpayer also knows that she did not volunteer every week, because she had the flu once or twice, and she was away on vacation for three weeks. She thinks she also missed one or two other days. Taxpayer decides to take a mileage deduction for her charitable volunteer work at the church by multiplying 45 days by 26.4 miles to get 1188 miles. She takes this figure and multiplies it by the standard mileage rate of 14 cents per mile for charitable volunteering. 1188 times $.14 equals $166.32.
IRS audits taxpayer. Even though the auditor knows the Cohan Rule and should apply it in the audit, he denies taxpayer the entire $166.32 deduction, because the taxpayer does not have a log or calendar showing exactly which weeks she did and did not volunteer at the church. Perhaps there are other audit changes made by the IRS, and the IRS sends taxpayer a report stating that taxpayer owes an additional $100 in taxes and $65 in penalties and interest. The taxpayer is so angry about this, she decides to file a Tax Court petition herself.
If no satisfactory settlement is arrived at prior to trial, the case will be tried to one of the tax court judges or special trial judges. At the trial, the taxpayer calmly explains to the Judge how she arrived at the mileage deduction for her volunteering at her church. (She might also present testimony from another volunteer to prove that she did, in fact, volunteer quite regularly.) The Judge decides that she is a credible witness, that her calculations make sense, but the Judge is not completely convinced that 45 days was correct. Applying the Cohan Rule, the Judge decides that the evidence showed that the taxpayer incurred the deductible expense and decides that the taxpayer should receive a deduction for 43 days, believing that the taxpayer probably missed a few more days than she remembered. Therefore, the Judge allows a deduction calculated as 43 days times 26.4 miles times $.14 per mile or $158.93.
The moral of this example is that the taxpayer should have kept a complete and accurate log of her volunteer days at her church, but, even though she failed to do so, she shouldn't lose the entire deduction for lack of specificity.
Q. My doctor has recommended that I have heart surgery in the next few months because of my heart condition. I am going to need to install an elevator in my home, so I will be able to get to my bedroom on the second floor. Is any of this expense tax deductible?
A. Yes. The general rule is that capital expenses for medical care can be deducted as a medical expense to the extent that the cost of the permanent improvement exceeds any increase in fair market value of your property. With the help of a real estate professional, determine the amount, if any, the value of your house will increase with the installation of the elevator. Subtract the cost of the increase in value from the cost of installing the elevator. Any amount greater than zero equals the amount of medical expense you can add to other medical expenses for you, your spouse, and your dependents to arrive at the "Medical and dental expenses" figure to enter on Line 1 of your Form 1040, Schedule A.
The 2008 standard mileage rates were:
- Business miles driven - 50.5 cents per mile from January 1, 2008, through June 30, 2008, and 58.5 cents per mile for July 1, 2008 through December 31, 2008.
- Medical and Moving miles driven - 19 cents per mile from January 1, 2008, through June 30, 2008, and 27 cents per mile for July 1, 2008 through December 31, 2008.
- Miles driven in service of charitable organizations - 14 cents per mile for the whole year.
The 2009 standard mileage rates are:
- Business miles driven - 55 cents per mile.
- Medical and Moving miles driven - 24 cents per mile.
- Miles driven in service of charitable organizations - 14 cents per mile.
(Reference: IRS Announcement, November 24, 2008)
Q. Can you help us understand the rules regarding deducting mileage for medical care?
A. Transportation expenses for medical care (including dental care) for you, your spouse, and your dependent(s) should be included in the "Medical and Dental Expenses" part of Form 1040, Schedule A. Most people use the "standard mileage rate" allowed by the IRS, rather than the actual cost of gasoline, tires, oil, etc.
The standard mileage rate in 2008 for medical care was 19 cents per mile for the first six months of the year, and 27 cents per mile for the last six months of the year. If you kept a log or diary showing how many miles you drove your car for medical purposes, you would multiply the miles driven from January 1, 2008, through June 30, 2008, by 19 cents and the miles driven from July 1, 2008, through December 31, 2008, by 27 cents. You can also deduct parking fees, tolls, taxi fares, and bus fares.
For example, John drove 1,000 miles between January 1st and June 30th for medical care for himself, his wife, and their two minor children. During that same period, Mary, John's wife, also drove 1,000 miles for medical care for herself and the children. Since John and Mary file a joint return, they would multiply 2,000 by 19 cents to arrive at one part of their medical care expense ($380) for 2008. If John and Mary each drove 1,000 miles between July 1st and December 31st, they would multiply 2,000 by 27 cents to arrive at another part of their medical care expense ($540) for 2008.
To this $920, John and Mary would add their other medical expenses, such as out-of-pocket costs for health insurance, medicines, doctor and dental visits, eyeglasses, etc., to arrive at their total medical and dental expenses. Sadly, since the amount of the allowable deduction is the total of all medical and dental expenses (line 1 on Schedule A) minus 7.5% of their adjusted gross income (line 38 on their 1040), many taxpayers find that they spend a lot of money on medical and dental care but wind up with little or no allowable deduction.
For more information about medical and dental expenses, see IRS Publication 502.
Q. Our teenage son moved into a supported living facility this past February. He receives SSI and Medicaid benefits. Can we still claim him as a dependent on our 2008 income tax return?
A. Unfortunately, no. In this situation, as in almost every other situation other than one involving divorced parents, the rule is that the teenager must have lived in his parents' household for more than six months of the year to be considered a dependent. (Internal Revenue Code Section 152(c)(1)(B).)
Q. My son's physician has prescribed a special diet to treat my child's medical condition. Is that a deductible medical expense?
A. Yes, if the physician has actually written out a prescription (and not just given you a paper as a guide). As a rule of thumb, it would be deductible, if you can use the prescription to avoid sales tax on the items, if they would ordinarily be subject to sales tax.
Treasury Regulation section 1.213-1(e)(ii) states: "ii) Amounts paid for operations or treatments affecting any portion of the body, including obstetrical expenses and expenses of therapy or X-ray treatments, are deemed to be for the purpose of affecting any structure or function of the body and are therefore paid for medical care. * * * Deductions for expenditures for medical care allowable under section 213 will be confined strictly to expenses incurred primarily for the prevention or alleviation of a physical or mental defect or illness. * * * However, an expenditure which is merely beneficial to the general health of an individual, such as an expenditure for a vacation, is not an expenditure for medical care."
In my opinion, taxpayers will get different answers to the question posed from different auditors. However, in my opinion, special diets to ameliorate or "cure" a medical condition are "treatments affecting [a] portion of the body" and therefore meet the definition of "medical care." Further, since this care is for the alleviation or cure of "a physical or mental defect or illness," such expenditures are deductible as medical expenses under IRS Code Section 213.
The IRS, if it challenges the deduction, could argue that if the cost of substituting one type of flour for another to meet the strictures of a specific diet does not exceed the cost of the "typical" flour, there is no medical expense. For example, if the cost of oat flour is $4.00 per pound and the cost of wheat flour is also $4.00 per pound, the IRS would probably argue that the money spent for the oat flour is not a deductible medical expense. If, however, the cost of the oat flour is $10.00 per pound versus $4.00 per pound for the wheat flour, I can't see how IRS could argue that a $6.00 per pound deduction would be improper.
See Circular 230 Notice, below.
Q.: My son lives at home and receives SSI. He pays us a flat amount per month for rent and food. Does the money received from my son have to be reported as income on our tax return?
A. No. Payments by a family member for "rent" or other living expenses to another family member does not constitute income. It is more akin to reimbursement for expenses, and should not be reported on your tax return.
See Circular 230 Notice, below.
Internal Revenue Service regulations require that certain types of written advice include a disclaimer. To the extent the preceding message contains advice relating to a Federal tax issue, unless expressly stated otherwise the advice is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer, for the purpose of avoiding Federal tax penalties, and was not written to support the promotion or marketing of any transaction or matter discussed herein.
