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Tax deduction for return prep for deductible payroll

Technical topics regarding tax preparation.
#1
Nilodop  
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Taxpayer has a disabled family member who requires 24/7 at-home nursing care of the clearly deductible type. Uses payroll service to pay the nurses, remit withholdings, and prepare all necessary state and federal payroll tax returns, W-2s, and Schedule H. Payroll company sends packet each year to taxpayer for use in 1040 preparation. This year's packet says
Please note, due to the Tax Cuts and Jobs Act, Tax Prep Fees (XYZ Service Fees) can no longer be claimed as deductions on your personal income tax return
. In this taxpayer's case, that's nonsense, right? If it was a household employee such as a housekeeper, ok, I see it. But if the nurses' pay, their meals, the employer's share of their payroll taxes, are all deductible as medical expenses, along with the payroll company's charges, the small part that applies to return prep is not carved out as misc itemized deduction. Right? Right!
 

#2
Nilodop  
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Right?
 

#3
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Where would one report it? Yes, I know that's not conclusive, but it's a good place to start. At my former employer's we did lots of household employers and I do not recall that we did anything other than Schedule A.
 

#4
Nilodop  
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Medical.
 

#5
makbo  
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At first, I thought the misc. itemized deduction for tax prep (suspended for a while under TCJA) only applied to income tax return preparation. But now I think it applies to all tax return preparation.

"§212. Expenses for production of income. In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year-[...]
(3) in connection with the determination, collection, or refund of any tax."


By lumping in your payroll tax under "any tax", is Sec. 212 inadvertently limiting the deduction you want?

The payroll tax prep fees are not for an income tax return, but taxpayer presumably wants the deduction to apply to taxable income. It's not a trade or business activity, but you say the payroll tax return prep fees are a deductible as a medical expense for personal purposes.

Medical expenses need to be for medical care, of course. We have on the one hand this comment from Pub 502, about legal fees:

However, you can't include in medical expenses fees for the management of a guardianship estate, fees for conducting the affairs of the person being treated, or other fees that aren't necessary for medical care.

It's not the same "ordinary and necessary" expense critieria that it is for a business.

But under "Nursing services", "Employment taxes. You can include as a medical expense social security tax, FUTA, Medicare tax, and state employment taxes you pay for an attendant who provides medical care. If the attendant also provides personal and household services, you can include as a medical expense only the amount of employment taxes paid for medical services as explained earlier."

As a practical matter, I don't think deducting the payroll tax prep fee as a medical expense would be challenged, especially given that it's probably below $1K / year. But I'm not sure there is clear support in the tax law for saying it is a medical expense rather than an expense under Sec. 212.
 

#6
Nilodop  
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I would not deduct it simply because it won't be challenged as a practical matter because it is small. I would deduct it if it is properly part of medical expenses. The nurses get a salary that is subject to FICA, and the FICA and FIT withholding get reported on a return. I'd argue that all those costs are associated with the medical aspects of having a nurse. Isn't it analogous to tax return preparation for Schedule C?
 

#7
makbo  
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Nilodop wrote: I'd argue that all those costs are associated with the medical aspects of having a nurse. Isn't it analogous to tax return preparation for Schedule C?

I don't see Schedule C as a good comparison, because that is an activity for the production of income, whereas personal medical care is not. That's what I meant when I said it's not the same "ordinary and necessary" test as it would be for a business expense.

I think it's a reasonable position to take that it is an expense for medical care, but on the other hand as a pure technicality, I think Sec. 212 might have explicitly removed it from that category, and moved it into one that instead falls under the old 2%-of-AGI category, the one your payroll provider identified as no longer being deductible under TCJA.

But maybe I'm mis-reading Sec 212, as it does refer to "production of income", even though it says "any tax". I was putting a lot of emphasis on the single word "any", perhaps over-zealously.
 

#8
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Nilodop wrote:The nurses get a salary that is subject to FICA, and the FICA and FIT withholding get reported on a return. I'd argue that all those costs are associated with the medical aspects of having a nurse.


I think there is a reasonable position to deduct these expenses as associated costs of having medical staff and, thus, a medical expense. The same services could be provided by an agency that would roll all these costs into a fee to the individual receiving care. There would be no requirement to parse out these administrative costs in that instance. Why would you penalize the recipient of the same caregiving situation because they are self-administering?
~Captcook
 

#9
JR1  
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I agree.
Go Blackhawks! Go Pack Go!
Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
For FB'ers: https://www.facebook.com/groups/BenRoberts/
 

#10
Nilodop  
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Thank you one and all.
 

#11
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CaptCook wrote:
Nilodop wrote:The nurses get a salary that is subject to FICA, and the FICA and FIT withholding get reported on a return. I'd argue that all those costs are associated with the medical aspects of having a nurse.


I think there is a reasonable position to deduct these expenses as associated costs of having medical staff and, thus, a medical expense. The same services could be provided by an agency that would roll all these costs into a fee to the individual receiving care. There would be no requirement to parse out these administrative costs in that instance. Why would you penalize the recipient of the same caregiving situation because they are self-administering?


Absolutely.... all costs that would be incurred at the agency level.
 

#12
dave829  
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In Rev. Rul. 57-489 (yes, I know it’s old, but …), the IRS ruled that the employer’s portion of FICA tax for wages paid to a nurse to provide medical services was deductible as a medical expense. The IRS justified this by saying that the FICA tax was “considered an integral cost of nursing services and thereby deductible as payments for medical care under section 213.” In Rev. Rul. 74-176, the IRS repeated the same justification for deducting FICA tax as part of child care expenses.

I don’t know why the same justification couldn’t be used for deducting the cost of payroll service for the nurse as a medical expense. It is certainly an “integral cost” of the nursing services.
 

#13
makbo  
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dave829 wrote:I don’t know why the same justification couldn’t be used for deducting the cost of payroll service for the nurse as a medical expense.

Um, because there is no revenue ruling saying so? And the same information about deducting FICA was already noted in post #5.

Nilodop wrote:I would not deduct it simply because it won't be challenged as a practical matter because it is small. I would deduct it if it is properly part of medical expenses.

Well, you still don't have any substantial authority for that, just a chorus of yeas from TaxProTalk. Again, just because something might be deductible as an ordinary and necessary business expense does not automatically mean you can deduct the same thing by calling it an expense of medical care. Look at mileage -- you wouldn't be able to deduct any mileage for medical care if it wasn't explicitly allowed by the tax code (even though mileage is considered an ordinary and necessary business expense).

If we were talking about a $50K expense, I wonder if the replies would be the same. Like everyone else, I agreed that you could deduct it, but only because it is a reasonable position and would never make it to a court case.
 

#14
Nilodop  
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Look at mileage -- you wouldn't be able to deduct any mileage for medical care if it wasn't explicitly allowed by the tax code (even though mileage is considered an ordinary and necessary business expense).. Is that necessarily so? Look at charitable contributions. Mileage (or actual expenses) is not explicitly allowed by the tax code (even though they are considered an ordinary and necessary business expense). They're in rulings and regs. I can see similar reasoning for medical out-of-pocket expenses.
 


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