Q&A: Deducting medical expenses racked up by another person

Dear Liz: I recall reading that an individual could deduct unlimited medical expenses for another person, as long as the provider was paid directly. Looking at IRS Publication 502, it appears that now only a “qualifying relative” (the closest I could get to eligibility) is eligible for a deduction on another person’s return. I’m asking because my sister is helping with my medical expenses, and I had hoped to give her a deduction. Her tax person is insistent that she cannot take a deduction for my expenses. I don’t qualify under the “qualifying relative” clause because she doesn’t provide more than half my support. Have I always misinterpreted this rule, or has the rule changed recently?

Answer: You’re confusing the medical deduction rules with the gift tax exemption.

The gift tax rules require givers to file tax returns for gifts in excess of $14,000 per recipient, unless the giver paid medical or tuition expenses directly to a provider (such as a hospital or college). Paying these expenses isn’t considered a gift, so your sister can pay an unlimited amount of your medical bills without having to file a gift tax return or counting those gifts toward her lifetime exclusion amount, which is currently $5.49 million. Gift taxes aren’t owed until that lifetime exclusion amount is exceeded.

Your sister can deduct medical expenses from her income taxes only when she pays them on behalf of herself, her spouse, her dependents and her “medical dependents.” Claiming someone as a dependent or medical dependent requires that she provide at least half that person’s support. Only the amount of qualifying medical expenses that exceed 10% of her adjusted gross income in 2017 would be deductible.

Q&A: Getting cash to pay medical bills

Dear Liz: I am 63 and retired from my full-time job last year since I have bad health. I work part time now and have tons of medical bills because of stage one cancer. I need additional cash. Is there some way I can get an advance using my pension check as collateral? In addition, is there any way to get an advance from those insurance people who pay people who may die in less than five years? I can’t say when I’m going to kick the bucket but any suggestions you may have that will allow me to get some immediate financial assistance will be greatly appreciated.

Answer: Let’s reinforce what you just said: You don’t know when you’re going to die. A stage one cancer diagnosis is far from an immediate death sentence. You could live for decades, so the mistakes you make now could haunt you for a long time.

Yes, there are some companies that will give you a lump sum in exchange for the next five to 10 years of your pension payments. You should avoid them like the plague. The effective interest rates they charge can be astronomical and you’ll probably be much worse off. If you’re having a hard time making ends meet now, losing a source of income won’t help.

Even if you were going to die soon, no one would hand you money just because of that fact. Those “insurance people” are actually investors who buy cash-value life insurance policies, often from the terminally ill. If you had such a policy, you might be able to sell it for an amount somewhere between the surrender value (what you’d get from the insurer by cashing it in now) and the face value (the dollar amount for which you’re insured). These transactions are called life insurance settlements. If you did have such a policy, though, you probably would be better off just borrowing the amount you need from its cash value.

Consider consulting an experienced bankruptcy attorney if you have more bills than you can pay. Medical bills, along with credit card balances and other consumer debt, can be erased in a Chapter 7 bankruptcy filing. Once the debt is gone, you can start rebuilding your finances for what may be a longer life than you expect.

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