Eldercare issues clarified by Tax Court

Many of you are at the same point in your lives as I am. As you're joining the "of a certain age" club, you also have an older parent whom you're helping out in any way you can.

That's what New Jersey resident Anthony Olivo was doing.

He provided nearly full-time care to his mother from 1994 to 2003, basically giving up his legal practice during those years. Following his mother's death, Olivo became administrator of her estate.

He filed a tax return for the estate and claimed a deduction of $1.24 million as a debt he said the estate owed him for the care he had provided his mother over the years. He based the deduction on what he said was was an oral agreement with his mother that her estate would compensate him for his services.

Well, you know what they say about verbal contracts. They are as good as the paper they're written on.

The Internal Revenue Service disallowed the deduction. Olivo took his case to the U.S. Tax Court, which sided with the IRS.

Without specific and clear documentation, the Court said it must assume that Olivo provided his mother's care services without any expectation he would be repaid.

So this Follow-up Friday lesson regarding care for an aging parent is that if you expect to be compensated for being a good daughter or son, get it in writing.

Another estate, however, had better legal and tax luck when the Court ruled that payments to non-medical caregivers are deductible as medical expenses.

Lillian Baral's doctor recommended that she get around-the-clock care because she suffered from dementia. Those care costs that exceeded the 7.5 percent itemized deduction threshold were claimed on Baral's tax return.

The IRS disallowed the claim. After Baral died, her estate went to Tax Court, arguing that the payments made to the elderly woman's caregivers were for necessary personal care required due to her diminished capacity.

The Tax Court agreed with the Baral estate that her condition did qualify as a chronic illness and said the deductions could count.

Both of these cases illustrate the tax potential and tax pitfalls that arise in helping an aging parent.

If your substantial contributions to the well-being of your mom, dad or both parents include financial aid, talk to your attorney and/or accountant about possible tax implications.

By being prepared, everyone in the family, as well as the IRS, will be happy.

Related posts:

• Happy Father's Day 2011: Taking care of dad
• Taking care of mom with some help from the tax code
• Sorry, senior citizens, there's no stimulus rebate check in sight ... yet

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Comments

[Clint Rowley]

I agree that it is important to speak with a attorney when it comes to things like this. That's unfortunate for the first case.