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.

Tuesday’s need-to-know money news

Today’s top story: How to take the heat off your summer budget. Also in the news: How to find out if you’ll owe taxes on an inheritance, 3 things your student loan servicer might not tell you, and what happens to your credit score when you transfer a balance.

How to Take the Heat Off Your Summer Budget
Keep your costs in check.

Find Out If You’ll Owe Taxes on an Inheritance
Don’t spend all that money quite yet.

3 Things Your Student Loan Servicer Might Not Tell You
They’re not always forthcoming.

What Happens to Your Credit Score When You Transfer a Balance?
Looking at the numbers.

Q&A: When generosity becomes a taxing issue

Dear Liz: I recently came into some money, and I would like to share it with my family. I understand that there are annual tax caps on how much you can give to someone ($14,000 per person per year). However, does this limit apply only to cash and cash equivalents or also to any other gifts? For instance, can I pay off a sibling’s student loan for more than $14,000 without running afoul of the limits?

Answer: There’s no cap on how much money you can give to another person. But if you give more than $14,000 to any one person, you have to file a gift tax return (IRSForm 709). You won’t actually owe gift taxes until the amount you give in excess of that limit totals more than $5 million. (The precise limit this year is $5.49 million and it’s scheduled to rise by the rate of inflation in coming years.)

Paying most bills, including student loans, on behalf of another person counts as part of that $14,000 limit. The only exceptions are if you pay someone’s tuition, medical expenses and health insurance. To avoid the limit, you would have to pay the bills directly to the provider (such as the school, doctor, hospital, insurance company and so on). If you give the money to the person to pay these expenses, it counts as part of the $14,000 exemption.

Some people keep rigidly to the $14,000 limit to avoid having the excess gifts reduce their estate tax exemption. (Gifts over the $14,000 limit are added back into a person’s estate at death, and the prevailing estate tax exemption — which is also currently $5.49 million — is deducted from that enhanced total.)

If you aren’t a multimillionaire, though, this probably isn’t something you need to worry about. If you go over the $14,000 per person limit, you just have to deal with a little paperwork.

Q&A: This trust avoids probate (but not death and taxes)

Dear Liz: Reading your articles I understand that having a revocable living trust makes transferring wealth quicker and easier. What about taxes? If you use a will to bequeath your house, for example, the beneficiaries get a stepped-up cost basis. What are the taxes with a revocable living trust? Do you pay taxes on assets going into the trust and again going out to the beneficiaries? What are the tax advantages and disadvantages of a trust?

Answer: Many kinds of trusts have tax implications, but revocable living trusts typically don’t. Your assets get the same tax treatment as if you held them outright.

Some people mistakenly believe that revocable living trusts can help them avoid or eliminate estate taxes. The purpose of a living trust is primarily to avoid probate, the court process that otherwise follows death. In some states, including California, probate can be lengthy and expensive, which often makes a living trust worth the cost and effort to set up.

Living trusts also offer more privacy because they don’t have to be made public, unlike a will, which becomes a public record at your death. Living trusts also make it easier for your appointed person to take over for you in case you become incapacitated.

Thursday’s need-to-know money news

Today’s top story: How to cash in on short-term rentals like Airbnb. Also in the news: How to get your business out of debt in five steps, and how to make to make the most of your summer vacation.

How to Cash In on Short-Term Rentals Like Airbnb, VRBO
Generating extra income with your extra bedroom.

How to Get Your Business Out of Debt in 5 Steps
Taking the first step.

How to Make the Most of Your Summer Job
Put aside some cash.

Friday’s need-to-know money news

Today’s top story: What to do when you get an IRS audit notice. Also in the news: Budgeting for new parents, where to sell your stuff online, and how your credit score is linked to your chance of divorce.

I Got an Audit Notice From the IRS — Now What?
Take a deep breath.

Budgeting for New Parents: From Day Care to College
In it for the long haul.

Where to Sell Your Stuff Online
Getting rid of what you don’t need.

Your Credit Score Is Linked To Your Chance of Divorce
What the two have in common.

Wednesday’s need-to-know money news

Today’s top story: Goofed on your tax returns? Here’s what to do. Also in the news: 5 awful reasons to buy a stock, what newlyweds need to know about insurance, and does free shipping make you spend more money.

Goofed on Your Tax Return? Here’s What to Do
Don’t panic.

5 Awful Reasons to Buy a Stock
Be cautious when buying.

What Newlyweds Need to Know About Insurance
Changes you need to make.

Does Free Shipping Make You Spend More Money?
When free shipping gets costly.

Q&A: Capital gains taxes explained

Dear Liz: Do I understand correctly that I must live in a house for two years before selling it to avoid paying capital gains tax, regardless of how much I may profit from the sale?

Answer: You do not. You must live in a home for two of the previous five years to exempt up to $250,000 of home sale profits. (Married couples can exempt up to $500,000.) After that, you’ll pay capital gains taxes on any remaining profit.

Even if you didn’t last the full two years, you may be able to claim a partial exemption if you meet certain criteria, such as having a change in employment, a health condition or other “unforeseen circumstance” that required you to move out.

Thursday’s need-to-know money news

Today’s top story: Trump’s Tax Plan: Big Changes, Big Unknowns. Also in the news: Savings lessons from retirees for millennials, how to teach your kids about money when you’re a financial disaster, and why 40% of Americans spend up to half of their income servicing debt.

Trump’s Tax Plan: Big Changes, Big Unknowns
What we know so far.

Millennials, Take This Savings Lesson From Retirees
Retiree wisdom.

How to Teach Your Kids About Money When You Are a Financial Disaster Yourself
Learning from your mistakes.

40% of Americans spend up to half of their income servicing debt
Discretionary spending is a big part of the problem.

Wednesday’s need-to-know money news

Today’s top story: 3 questions to answer before taking out student loans. Also in the news: Debt collection goes high-tech, 7 alternative ways to pay your taxes, and credit card rental insurance doesn’t cover as much as you think.

3 Questions to Answer Before Taking Out Student Loans
Important things to consider.

From Stone Age to Drone Age: Debt Collection Goes High-Tech
Send in the drones!

7 Alternative Ways to Pay Your Taxes
Thinking outside the box.

Credit Card Car Rental Insurance Doesn’t Cover as Much as You Think
Reading the fine print.