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Write off care-facility entrance fee

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in Small Business Tax

Will one of your relatives be entering a continuing-care facility? The family will probably pay a hefty entrance fee plus the regular monthly payments. To ease the sting, part of the cost could qualify for a medical-expense deduction.

How much can the facility resident deduct? That’s still open to debate.

New case: A couple paid more than $750,000 as an entrance fee to a lifetime-care facility. At first, they took a medical-expense deduction approximating 20 percent of that amount, based on the facility’s operating cost analysis.

The taxpayers later filed an amended return for the tax year in question, claiming a medical deduction on 41 percent of the entrance fee cost, or more than twice the original amount. Reason: They based the revised amount on a recalculation by the facility using an actuarial method projecting longevity and health care utilization.

Initially, the IRS said that no portion of the entrance fee could be deducted as a medical expense. Then it objected to the 41 percent deduction amount.

But the District Court disagreed with the IRS. First, it said that a portion of the entrance fee was attributable to medical care, thus entitling the couple to deduct at least 20 percent. Now the court is considering whether the deduction may be based on 41 percent of the cost. (Finzer, D.C., Ill., No. 06 C 2176, 3/7/07)

Tip: If you pay the medical expenses of a dependent relative, the cost is added to your medical expense total. You can deduct the excess of the expenses over 7.5 percent of your AGI.

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