30-year old taxpayer incurs a deductible expense in late 2015 but doesn't have enough funds to pay the expense. His parents pay for the expense in
2015 using their credit card, and then he repays his parents in mid-2016.
Can the taxpayer claim the deduction on his 2015 taxes even though the expenses were initially paid by his parents? Does the type of expense (e.g., medical, taxes, business expense, etc.) have any effect on this? Does he need any type of written agreement with his parents to support this in the event of an audit?
Taxpayers can say they gifted the money and and then paid the bill in his behalf. Or they can loan the amount and gift the interest or payments each year.
I should clarify that the credit card used by the parents has a 0% interest option until mid-2016, meaning there would be no interest charges if the minimum payment is made each month and a final balloon payment is made when the 0% period runs out in mid-2016. So the way this would actually work is the parents use their card to pay the expense (about $8000, well below the gift limit) and then they make the minimum required payments each month (most of which would be made in 2016) until they make the final payment in mid-2016. The son reimburses them each month after they make the minimum payment and then reimburses them for the final balloon payment as soon as it's paid.
Let me preface this with the disclaimer that I have no particular expertise in tax matters.
It would seem that if there were a bona fide loan to the taxpayer to pay the expense that it would be deductible. I believe there may be issues sometimes if the loan is made by the entity that provides the service or goods, but that doesn't seem to be the case.
Unclear is what effect the use of the credit card to pay the bill directly is important (versus loaning cash to the taxpayer). It certainly might make the transaction more open to challenge though. If this has not yet happened, it would (in my completely layman's opinion) be cleaner if money were loaned.
Probably not. A loan would normally be a transaction independent of the payment of the expense. But the method could make this seem otherwise.
Written records are always good for audits. :) One would want to document that this is, in fact, a loan of the funds rather than a payment of the expense. For some items (like property taxes), to be deductible it has to be paid by someone who has an interest / requirement to pay. So a straight-up loan would be a much cleaner way to go.
Also be aware that there may be a need to pay interest at the applicable federal rate on the loan, which would be income to the parents.
The "deemed interest" requirement only applies if the total outstanding loans are at least $10,000, and the short term AFR (Applicable Financial Rate) has been under 1/2 % for some time.
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