Paying Someone Else's Deductible Expense

The issue in the past was whether the person paying the property tax or mortgage interest for someone else could take the deduction. That's not the issue in the case you are referring to.

In your case it's the opposite situation. Someone paid the deductible bill for someone else, and the person whose bill it was took the deduction. It was a legitimate gift. I don't see a problem with it, since the person paying the bill would not be able to deduct it.

This is the main topic of your post, which Stu is further clarifying in his initial reply.

And under Medical deductions the IRS says: "You can include only the medical and dental expenses you paid this year, regardless of when the services were provided. If you pay medical expenses by check, the day you mail or deliver the check generally is the date of payment. If you use a ?pay-by-phone? or ?online? account to pay your medical expenses, the date reported on the statement of the financial institution showing when payment was made is the date of payment. If you use a credit card, include medical expenses you charge to your credit card in the year the charge is made, not when you actually pay the amount charged."

Lastly, the decision reiterates that it is the substance of the transaction and not the form that matters.

Does this mean that no-one gets to take the deduction -- not the owner because they didn't pay it, not the parent who actually paid the bill because they were not legally obligated to pay it?

If the court allows the medical deduction to be taken by the taxpayer, it's as if the parent gave the taxpayer the gift and the taxpayer paid it, in which case the parent must file a gift tax return if the property tax + medical expenses were more than the 12k threshold.

But if the parent is not paying gift tax on the medical expenses, then they only the parent can take the medical deduction. Their child can be their dependent for the medical expense deduction, but not the personal exemption. This is what seems logical to me.

Medical costs of another person paid by the taxpayer directly to the provider are NOT gifts for federal gift tax purposes.

It may seem logical to you but the Tax Court did not rule that way.

Exactly what the court said. Substance over form.

in which case the parent must file a gift tax return if the

Repeating what Bill Brown said.... exempt from Gift tax rules as payments were made directly to the medical providers.

In this instance the child is not a dependent for the exemption and no mention was made as to whether the child was a dependent for medical expense purposes as the parent was not going to take a deduction. Lastly, from the decision: "Although Mrs. Field and petitioner would not be subject to the gift tax, the income tax treatment in this context is not controlled by the gift tax consequence. See Pierre v. Commissioner, 133 T.C. 24, 35 (2009)."

I expect that the IRS will not acquiesce to this situation.

1) The donor gave a gift. No deduction. 2) The recipient was relieved of a liability. No deduction*, but also no income as gifts are not taxable to the recipient.

No deduction per the income tax side of the law, except due to a quirk in gift tax law, the amount of the gift reportable is actually under the threshold for requiring a Form 709. Upon reading the decision, it appears such had a bearing on the outcome. That quirk deemed the payment as relayed through the recipient even though in form it was paid directly to the third-party.

Had a form 709 been required, the outcome might have been diferent.

That last statement is not that clear to me. Had the mother actually gifted the amount to her child rather than paying the bills directly, a Form 709 would have been required by the mother and the child could take the deduction after spending the funds on medical expenses. The outcome to the child, is the same.

"the following taxes shall be allowed as a deduction for the taxable year within which paid or accrued: (1) State and local, and foreign, real property taxes."

I find nothing in the statute that requires the taxpayer to have the obligation to pay the real property taxes.

I believe Reg 1.164-3(b) is where you can find the answer. The tax must be imposed on someone who has an interest in the property.

Maybe so, but it looks like double dipping. The medical expense paid by a third person is both free from the gift tax as well as allowable for a deduction.

If the donor gave cash to the donee and the donee wrote a check to the doctor would you call that double dipping? In substance there is no difference between the two ways of having the donor pay the donee's medical expenses.

In your example above, the donor would be liable for gift tax, but the the donee who paid the bills would get the deduction. In the original post, the donor gets to pay no gift tax, and the donee gets to take a deduction. But I guess this is what the law says, so I'm fine with that, was just saying it sounds illogical to me.

Then there would exist the issue of gift tax.

The gift tax is the difference.

Seth