payment made to Medicaid

Technical topics regarding tax preparation.
#1
philly  
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Senior Citizen goes into a nursing home in 2018. The senior is on Medicaid. In April 2019 Senior sells her primary residence for $500,000. In April 2019 the Senior has to pay back to Department of Social Services $85,000 which represents the amount that was paid to the nursing home while the Senior was on Medicaid.

Can the $85,000 be taken as a Long-term care medical expense on the 2019 1040 ?
 

#2
Nilodop  
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I think so, assuming Senior is in nursing home for medical care/ qualified long term care.
 

#3
Doug M  
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Thinking out loud here. They payments were made in 2018 and 2019 by Medicaid on Senior's behalf. They take a lien on the property in 2018 for the payments made.

Don't you think there are deductions for 2018 and 2019 for the $85,000? Again, I do believe the nursing home was paid in 2018 and 2019.

Akin to the senior property tax deferral program in many states.
 

#4
Nilodop  
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My reasoning (can be wrong, I have little knowledge of Medicaid):
Section 213 gives a deduction for medical expensespaid during the taxable year. Taxpayer did not pay until 2019. Payments when paid by Medicaid were the liability of Medicaid (under the law), not of taxpayer. They became taxpayer's responsibility when home was sold.
Last edited by Nilodop on 19-Feb-2020 10:23pm, edited 1 time in total.
 

#5
Doug M  
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I believe Medicaid paid the nursing home each month so that they can pay their bills. They take a lien against the residence for amounts paid. Deemed paid by the taxpayer.
 

#6
Nilodop  
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Deemed paid by the taxpayer.. A reasonable answer. So should Medicaid patients be taking these deemed payments that are actually paid by Medicaid and only paid by the taxpayer if as and when the taxpayer's residence is sold for enough to repay Medicaid? As I said, I have little knowledge of Medicaid.
 

#7
Doug M  
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I'll throw in a twist. If the surviving spouse of senior is still living when senior passes, Medicaid will not be reimbursed until spouse exits or sells the residence. (Most surviving spouses endure financial hardship if Medicaid forces sale of residence.)

This could be years down the road when Medicaid is repaid. Do we wait for 10 years to take the medical deduction?
 

#8
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As I said, I have little knowledge of Medicaid.

And as I haven’t said, you have little knowledge of Medicaid. With that not said…

Doug’s theory is based on the creation of indebtedness idea…that when Mr. A (Medicaid) pays Mr. B’s (Medicaid recipient’s) expense, with “some type of right” of reimbursement, then indebtedness is created whereby Mr. A debits a Receivable and credits Cash…and Mr. B debits Expense and credits a Payable. This is so even on the cash basis. I think Nilo is suggesting that he’s uncertain about the nature of the reimbursement right at play here. But I think we are all in agreement that this is the issue.

Akin to the senior property tax deferral program in many states.

Wouldn’t one difference maybe be that in the Medicaid situation we have three parties (1) the government (2) the Medicaid recipient and (3) the nursing home?
 

#9
Doug M  
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There are three parties for the property tax deferral program.

State (pays the county and takes a lien on the property)
County (akin to nursing home)
Taxpayer
 

#10
philly  
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Back to my original question -Can the $85,000 be taken as a Long-term care medical expense on the 2019 1040 ?

Is the answer No ?
 

#11
Doug M  
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I am stating you have a medical deduction of $85,000. Which tax year(s) will it be applied to is the question. My position is that it needs to be allocated between the two tax years.
 

#12
Nilodop  
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Furthermore, most states have a limited timeframe (generally one year following the death of a Medicaid recipient) in which they can file for estate recovery.
. https://www.medicaidplanningassistance. ... e-my-home/. Sounds contingent to me. Deduction when paid.
 

#13
Doug M  
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A house worth $500,000 is contingent?
 

#14
sjrcpa  
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The Senior did not have to sell it, in which case Medicaid would have not received anything.
 

#15
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This is good stuff above. I found this synopsis in CCA 200725031. Bear in mind, it’s looking at the deduction from the payer’s/creditor’s standpoint. That’s moot since we’re dealing with Medicaid. But what’s not moot is that if the payer is denied a deduction upon payment of the expense (because of some right of reimbursement), then the payer would have a Receivable. It follows that the payee would have an Expense on the debit side and a Payable on the credit side.

A deduction for an expense for which there is a right or expectation of reimbursement may be disallowed because these payments are not expenses of the taxpayer and are instead in the nature of an advance or a loan. The extent to which the right must be established has varied. Some cases have denied the deduction because the right of reimbursement was fixed, others have allowed the deduction because the right of reimbursement was uncertain, and other cases have denied the deduction even if the taxpayer's right to reimbursement was subject to a contingency.

You’re welcome for entirely clarifying things…
 

#16
Nilodop  
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A deduction for an expense for which there is a right or expectation of reimbursement may be disallowed .... Yeah, but that ruling is about 162 and 165 deductions. Here we are dealing with 213 deductions for medical expenses. Correct me if I am in error, but I thought that medical expenses paid, for which a reimbursement by insurance or otherwise is anticipated but not received as of end of year are stll deductible in the year paid. So pretend for example that Medicaid is a non-exempt taxpayer that paid the patient's medical expenses, hoping, even expecting, to be reimbursed at some unknown future date from proceeds of sale of patient's house. Medicaid would be allowed to deduct those medical expenses, which would mean the patient would not be.

Now I'll admit it's an imperfect example because the expenses, to Medicaid, are not medical expenses of Medicaid. So we'd need to look at the authorities about a reasonable expectation of reimbursement, which gets us back to Jeff-O's excerpt that entirely clarifies the matter.

When you read the material in my link in #12 it is apparent that whether and when Medicaid gets reimbursed is subject to numerous exceptions.
 

#17
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Now I'll admit it's an imperfect example


I’ll say. I don’t think the two ideas – the one under 213 about deducting even if a prospect of reimbursement exists and the other about deemed paying an expense with borrowed funds – compete with each other.
 

#18
Nilodop  
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OK so let's stick with the "deemed paying an expense with borrowed funds". The payor doesn't know whether it will get the advance back, nor if so, when, and will not get interest inn the interim. But really, that's an aside, because we are wondering about the person whose LTC expenses are being paid. IMO that person does not have taxable income at the time of what you call his deemed payment because of the general welfare exclusion, not so much because it's a loan. So does he even have tax basis in his deemed payment to Medicaid? Probably.

Which leads me now to wonder whether his deemed payment can be deducted by him in any year. After all, section 265 does disallow deductions for expenses wholly allocated to exempt income.

Rev Rul https://www.bradfordtaxinstitute.com/En ... 66-262.pdf
CCA https://www.irs.gov/pub/irs-wd/0923025.pdf
https://www.courtlistener.com/opinion/4 ... missioner/

So is the deemed payment by the patient allocable to exempt income? More likely in the years when Medicaid is paying the nusing home, and probably also in a later year if that's when it gets paid back to Medicaid.
 

#19
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IMO that person does not have taxable income at the time of what you call his deemed payment because of the general welfare exclusion, not so much because it's a loan.


I think it depends. If this lien situation creates some type of repayment obligation, and hence, indebtedness, then I can see it as Doug sees it – a payment was made with borrowed funds. If this lien situation does not create any type of repayment obligation, then the receipt of the benefit would be tax free under the GWE. If there is a future repayment in this latter case, it wouldn’t be made with tax-exempt income. The funds would have to come from another source, as the funds tied to the GWE already went to the nursing home (directly from Medicaid).

I think the issue you raise would arise if the guy has no repayment obligation such that the GWE is invoked, but then he tries to deduct the payment that Medicaid made to the nursing home. That would be a deduction funded by tax-exempt income.
 

#20
Nilodop  
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So if it's a debt and for whatever reason it is discharged/never repaid, he must have COD income.
 

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