ObamaCare Individual Overview

by Kenneth Hoffman in , ,

The Patient Protection and Affordable Care Act (PPACA) is getting a lot of press these days and I thought this would be a good time to review some of the provisions that could affect you. While some of the law's provisions have already taken effect, many of the provisions will begin taking effect in 2013, 2014, and later years. This is a summary of some of the more significant individual provisions that may be of interest to you.

Penalty for Not Maintaining Minimum Essential Coverage

The crux of PPACA is the requirement for almost all individuals to maintain minimum essential healthcare coverage (i.e., the individual mandate). Beginning in January 2014, non-exempt U.S. citizens and legal residents are required to maintain such coverage or be subject to a penalty. Once the penalty is fully phased in, individuals who fail to maintain minimum essential coverage are subject to a penalty equal to the greater of 2.5 percent of household income in excess of the taxpayer's household income for the tax year over the threshold amount of income required for income tax return filing for that taxpayer or $695 per uninsured adult in the household.

The per-adult annual penalty is phased in as follows: $95 for 2014; $325 for 2015; and $695 in 2016. The percentage of income is phased in as follows: 1 percent for 2014; 2 percent in 2015; and 2.5 percent beginning after 2015. If you file a joint return, you and your spouse are jointly liable for any penalty payment.

Premium Assistance Tax Credit

Effective for tax years ending after December 31, 2013, the law creates a refundable tax credit, called the premium assistance credit, for eligible individuals and families who purchase health insurance through an insurance exchange. The premium assistance credit is generally available for individuals (single or joint filers) with household incomes between 100 and 400 percent of the federal poverty level for the family size involved.

Additional Hospital Insurance Tax

Beginning in 2013, the employee portion of the hospital insurance portion of FICA taxes is increased by an additional tax of 0.9 percent on wages received in excess of the threshold amount. This additional tax is on the combined wages of the employee and the employee's spouse, in the case of a joint return. The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case.

Unearned Income Medicare Contribution Tax

Beginning in 2013, in the case of an individual, estate, or trust, an additional tax is imposed on income over a certain level. This tax is referred to as the "unearned income Medicare contribution tax." Others have referred to it as a tax on investment income, although it can apply to individuals, estates, and trusts that do not have investment income. For an individual, the tax is 3.8 percent of the lesser of net investment income or the excess of modified adjusted gross income over a threshold amount. The threshold amount is $250,000 in the case of taxpayers filing a joint return or a surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case.

In the case of an estate or trust, the tax is 3.8 percent of the lesser of undistributed net investment income or the excess of adjusted gross income over the dollar amount at which the highest income tax bracket applicable to an estate or trust begins.

The new tax does not apply to items that are excludible from gross income under the tax rules, such as interest on tax-exempt bonds, veterans' benefits, and any gain excludible from income when you sell a principal residence.

Increase in Medical Expense Deduction Threshold

For 2013 and later years, the floor for taking a deduction for medical expenses is increased from 7.5 percent of adjusted gross income (AGI) to 10 percent of AGI. However, for any tax year ending before January 1, 2017, the floor will be 7.5 percent if the taxpayer or the taxpayer's spouse has reached age 65 before the end of that year.

FSA Limitation

Beginning in 2013, for a health flexible spending arrangement (FSA) to be a qualified benefit under a cafeteria plan, the maximum amount available for reimbursement of incurred medical expenses of an employee, the employee's dependents, and any other eligible beneficiaries with respect to the employee, under the health FSA for a plan year (or other 12-month coverage period) must not exceed $2,500.

Kenneth Hoffman counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how I can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday from 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

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Daughter Gets Tax Deduction For Expenses Mom Paid

by Kenneth Hoffman in , ,

Judith F. Lang v. Commissioner, TC Memo. 2010-286, December 30, 2010.

Mother paid medical expenses directly to provider, and also paid daughter’s real estate taxes. IRS denied deduction to daughter since the daughter did not pay the expenses. Tax Court ruled that based upon substance over form, the mother had in fact made a gift to the daughter, and the daughter was the payor of the expenses. Hence, the daughter is entitled to the deduction.


In 2006, Judith Lang incurred $27,776 of deductible medical expenses (assumed to be net of the 7½% of AGI limitation), and had $6,840 of real estate taxes.  Her mother, Frances Field, paid $24,559 directly to Judith’s medical providers and paid $5,508 directly to the city to pay for Judith’s real estate tax. Mrs. Field had no obligation to make these payments. Nor did she claim an income tax deduction for these payments.


In order to claim a deduction for medical expenses, the expense must be for the taxpayer, spouse or dependent. Since Judith was not a dependent of Mrs. Field, Mrs. Field could not legally claim a deduction. In order to claim a deduction for real estate taxes, one must be legally obligated to make the payment. Mrs. Field was not.  The second requirement for each of these expenses is that the taxpayer actually make the payment.  It is this second requirement that was the subject of the case.

The IRS argued that Judith did not make the payment, and therefore she could not take the deduction. Judith countered that based upon substance over form, she received a gift from mom, and she was the actual payor of the expenses.


The Court sided with Judith, stating that Mrs. Field did make a gift to Judith and Judith gets credit for making the payment. The Court noted that Mrs. Field’s payments directly to the medical providers meant that, under the gift tax rules, these payments were not taxable gifts. But the Court said that the gift tax rules do not control for income tax treatment. Hence, Judith is entitled to the deduction.


If the IRS position was allowed to stand, then no one would be entitled to a deduction in this case; mom because it wasn’t her obligation, and daughter because she didn’t pay it. The Court seemed to look at this as a situation where SOMEONE should get the deduction, and wisely (in my opinion) decided in favor of Judith.


It should be noted that since the medical payments did not constitute a gift, and the real estate tax payment did not exceed the annual exclusion, there was no gift tax issue. I would suggest that it would not be a bad idea in situations such as this, or similar ones such as a grandparent paying college tuition and  the parent claiming a deduction or credit, that the actual payor file a gift tax return to document that they’ve made a gift to the person obligated to make the payment, so that that person can claim the deduction/credit.


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Tax Court Allows Medical Deduction For Home Health Care By Non-Professionals

by Kenneth Hoffman in ,

 Patricio A. Suarez  of Anderson Kill & Olick, PC writes:

In the recent case, Estate of Baral v. Commissioner (137 T.C. No. 1), the United States Tax Court held that payments of almost $50,000 made to an elderly woman's caregivers qualified as deductible medical expenses under the Internal Revenue Code because the expenses were not compensated for by insurance and the services constituted qualified long-term care services as defined in section 7702B(c) of the Code.

The background of the case was as follows: Lillian Baral, now deceased, was diagnosed by her physician as suffering from dementia. The physician determined that she required round-the-clock assistance and supervision for medical reasons. Ms. Baral's brother, acting under a power of attorney, hired two unlicensed caregivers to provide 24-hour care, and the cost of that care was deducted as a medical expense on Ms. Baral's income tax return. The IRS disputed the deduction but was ultimately overruled by the Tax Court, which held the deduction to be a legitimate medical expense.

Section 213 of the Code allows a deduction for medical care to the extent expenses exceed 7.5% of adjusted gross income. In 2012 the threshold rises to 10%. Medical care is defined as including long-term care services. Section 7702B(c)(1) defines "qualified long-term care services" as necessary diagnostic, preventative, therapeutic, curing, treating, mitigation, and rehabilitative services and maintenance or personal care services required by a chronically ill individual and provided pursuant to a plan of care prescribed by a licensed health care provider. According to section 7702B(c)(2), "chronically ill individual" is an individual who has been certified by a licensed health care provider as requiring substantial supervision to protect the individual from threats to health and safety due to an inability to perform at least two activities of daily living, disability or severe cognitive impairment. In the Baral case, her physician determined that Ms. Baral's dementia had left her cognitively impaired, which prevented her from properly taking her medicine. Since failure to take prescribed medicine posed a risk to her health, the physician certified Ms. Baral as requiring substantial supervision to protect her from threats to her health and safety.

In the Baral case, the court said that the services provided to Ms. Baral by her caregivers were necessary maintenance and personal care services that she needed because of her diminished capacity, and they were provided pursuant to a plan of care prescribed by a licensed health care provider. As such, the 24-hour care constituted qualified long-term care services under the definition provided in section 7702B(c).

The deductibility of such expenses is not limited to people with dementia or even elderly patients. Family members and practitioners should be aware of the potential applicability to much younger people having physical or mental impairments requiring the assistance of others. If provided pursuant to a plan of care prescribed by a licensed health care practitioner, the cost of personal care services can qualify as a medical expense for any patient unable to perform at least two of a list of six activities of daily living: eating, toileting, transferring, bathing, dressing and continence. But, while it is important to see the broader implications, it is just as important to note that special rules may deny a deduction paid to a relative for long-term care services are not deductible unless the services are provided by an individual who is a licensed professional with respect to the services. In the Baral case, the hired caregivers were not licensed professionals, but the deduction was allowed. If they had been relatives of the patient, the payments would not have been deductible.

Housekeeping Services

While personal care services may qualify for the medical expense deduction even if rendered in the patient's residence, the cost of domestic or housekeeping services is strictly a nondeductible living expense, even if incurred only because illness makes it impossible for the afflicted individual to perform the services himself or herself. For example, in one case cooking, cleaning, and other domestic services were held nondeductible despite a physician's advice to a taxpayer with a heart condition to hire a live-in housekeeper; or in another case where lawn-care costs were not deductible even though they were incurred because a physician advised the taxpayer not to cut his own lawn due to allergies.

As is often the case, Congress seldom writes a law that covers each and every situation. For those outside-the-box situations, or even just to be safe, it is often best to consult your attorney or tax professional.

Deductible or Non-Deductible?

Here are some examples from real life cases concerning various expenditures. See if you can determine whether or not the expense was held to be deductible. The answers can be found at the end.

1. Help in and out of bed, help walking and services to prevent falls and injuries (taxpayer with severe arthritis).

2. Costs of person who did housekeeping and provided baby care, who was hired on doctor's advice so that taxpayer, who had tuberculosis, would not have to do this work.

3. Help with taxpayer's wheelchair and luggage while he was away from home, help driving his car, daily removal and replacement of his prostheses, and daily administration of medication (taxpayer who had bilateral amputation of his legs).

4. Costs of someone being with ill taxpayer so as to be able to quickly summon emergency medical care.

5. Dressing, grooming and bathing an invalid taxpayer.

6. Amounts paid to persons who babysat for taxpayer's daughters so that taxpayer could travel to a warm climate, as his doctor suggested, to help in alleviating his chronic heart problem.


1, 3, 5 deductible; 2, 4, 6 not deductible

Patricio A. Suarez is an attorney in the New York office of Anderson Kill & Olick, P.C. Mr. Suarez's tax practice includes the full range of federal and state tax issues, as well as real estate transactions and transactions involving foreign and domestic entities.

About Anderson Kill & Olick, P.C.

Anderson Kill practices law in the areas of Insurance Recovery, Anti-Counterfeiting, Antitrust, Bankruptcy, Commercial Litigation, Corporate & Securities, Employment & Labor Law, Health Reform, Intellectual Property, International Arbitration, Real Estate & Construction, Tax, and Trusts & Estates. Best-known for its work in insurance recovery, the firm represents policyholders only in insurance coverage disputes, with no ties to insurance companies and no conflicts of interest. Clients include Fortune 1000 companies, small and medium-sized businesses, governmental entities, and nonprofits as well as personal estates. Based in New York City, the firm also has offices in Newark, NJ, Philadelphia, PA, Stamford, CT, Ventura, CA and Washington, DC. For companies seeking to do business internationally, Anderson Kill, through its membership in Interleges, a consortium of similar law firms in some 20 countries, can provide service throughout the world.

Anderson Kill represents policyholders only in insurance coverage disputes, with no ties to insurance companies, no conflicts of interest, and no compromises in its devotion to policyholder interests alone.

The information appearing in this article does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations

What Small-Business Owners Need to Know about Health Care Benefits

by Kenneth Hoffman in

Offering comprehensive benefits to employees can help you attract, hire, and retain the best workers. Yet many small-business owners believe that health care insurance is a luxury they can’t afford. The good news: Thanks to new incentives, tax credits, industry reform, and nontraditional plans, health care insurance may be within reach.

Continue reading at Intuit Small Business Blog