Introduction
The revenue authorities make adjustments to the actual gross income based on deductions and requirements that cause changes to the level of annual taxable income. The deductions that are made serve to reduce the level of taxable income while taking into considerations changes that could have caused the individual to incur added costs that lower their income in the year. They include medical expenses, interests on the mortgage, and losses due to accidents or theft among others. The revenue standards have requirements for the categories of taxable and nontaxable income. The issues of accidents cause losses to an individual to the extent that the person may be disabled, experience job loss; incur medical bills, and other adjustments to fit in his or her condition after the accident. This kind of loss creates issues and impacts on tax since there are medical expenses incurred, home adjustments or capital expenditure to cater for the condition, reimbursement of insurance, and where the adjustments increase the value of the property creating the need for individual case assessment for tax purposes. This paper shall address the facts, issues, authorities involved in the given case study. It shall further seek to give recommendations all aimed at determining the number of medical expenses to be claimed by the individual.
Case Summary
Mr. Smith was involved in an automobile accident in the previous year injuring his legs. In the course of treatment, his physician recommends swimming as a daily routine for him. There being no public swimming facility readily available near his locality, he has the option of either building one in his backyard or buying a home equipped with a swimming pool. He opts to buy a home with a swimming pool in the current year for which he incurs costs for replacement of the swimming pool apart from the cost of the home. He also incurs maintenance expenses of the pool and other medical expenses, while the existence of the pool increases the value of the home to some extent. He thus seeks to obtain the amount of the medical expenses he may claim for tax purposes.
Issues Identified
The case of Smith raises several issues in tax. First, it is whether the recommendation for swimming by the physician of Mr. Smith forms part of the medical expenses liable as a deduction. The accident that Mr. Smith was involved in caused injury to his legs. He has maintained visits to his physician. The physician is the one who recommends swimming as a daily routine for Smith out of which the idea of the swimming pool comes up. The issue of concern is whether the swimming recommended by the physician is recognizable to the revenue authorities as a medical expense for tax deductions (Pope, Anderson & Kramer, 2009).
Another issue from the case is whether the costs incurred in the replacement of the swimming pool as well as the cost of the new home with the swimming pool are to be considered as medical expenses. It is worth noting that the option of buying a home with a swimming pool was preferred over building one in the original home. The swimming pool however is replaced and improved at additional costs. Another issue is the determination of the medical expenses to be claimed by Smith in the current year. This is because the value of the new home has been increased by the replacement of the swimming pool and other maintenance costs.
Facts Determined
The given case scenario represents an issue of medical expenses incurred after an event of an automobile accident. Mr. Smith is the one that was involved and has undergone treatment and therapy from his physician who recommends swimming to be a daily routine for Smith. The therapy process appears to have undergone a reasonable duration of time and so from the long-term relationship, swimming is an additional; therapy to enhance the healing and recovery of Smith.
Smith is faced with the options of either building a swimming pool in his backyard or buying a new house equipped with one out of which he chooses the latter. The costs involved in buying the home are given as $175,000, while additional costs of $20,000 are incurred for the replacement of the pool most likely for purposes of fitting in the condition of Smith. The other costs are routine maintenance of the pool at $500 and other medical expenses amounting to $1,800. The existing pool is estimated to increase the value of the new home by $8,000.
Location of Applicable Authorities
The most applicable authorities in this scenario include the tax court, claims court, or the district court in deciding the physician’s recommendation of a swimming pool for the taxpayer as well as establishing the number of medical expenses to be claimed.
Evaluation of Relevant Authorities
The courts address claims of medical expenses liable for deduction where the amount exceeds 7.5% of the adjusted gross income (Dickson, 2008). They offer jurisdiction in cases involving medical expenses to be claimed that are incurred and paid for in the taxable year. They work in conjunction with the relevant revenue authorities (Cch Tax Law Editors, 2007).
Analysis of Case Scenario
Physician recommendation: The recommendation by a physician for a therapy that would involve capital expenditure is considered if it is for the health benefits of the taxpayer, spouse, or dependants (Pope, Anderson & Kramer, 2009). The tax court relies on the intention of the therapy. In this case scenario, Smith was involved in an accident that has required him to undergo therapy for a long time. The recommendation is based daily and qualifies as for the benefits of the health of Smith. The tax court needs to establish that the recommendation is not to for the mere health benefit of Smith but the improvement of his condition.
Capital expenditure: The costs incurred for the replacement of the pool are liable as medical expenses if the replacement is to fit for the condition of the individual and exceeds 7.5% of the adjusted gross income (Cch Tax Law Editors, 2007). In this case scenario, the pool was replaced for $20,000 an amount that is likely to cater to the health condition of Smith. This amount exceeds 7.5% of his AGI which is $60,000. The tax court needs to establish that the replacement costs of the swimming pool are to cater to the health condition of Smith and not to adjust to his condition or for recreation purposes. In the case scenario, none of his family is indicated thus increasing the chance that the costs are all for his condition.
Medical claims of Smith: In establishing the medical claims for Steve, the tax regulations require that such claims for deduction must exceed 7.5% of the total adjusted gross income. Further, the improvements have to be for the improvement of the well-being while the cost of the permanent improvement has to exceed the value it increases to the property (Dickinson, 2008).
Determining the Medical Expenses of the Tax Payer
The gross adjusted income of Smith in this scenario is $60,000. The medical expenses to be included for adjustment are the costs for maintenance of the swimming pool amounting to $500, other medical expenses amounting to $1,800. The other expenses for the costs of the replacement of the swimming pool in the existing house of $20,000 and thus exceed the value it increases to the building of $8,000 (Pope, Anderson & Kramer, 2009). This means that the amount liable for claims is the difference of $ 12,000. The total cost of buying the new home is not liable for medical purposes since it is not for the health concern of Smith but acts as a home just as the previous one. The total medical expense liable for claims is $14,300.
Recommendations
The recommendation by the physician for therapy based on swimming as a daily routine serves to improve the health of Smith thus is liable for as a medical expense (Pope, Anderson & Kramer, 2009). The replacement cost of the swimming pool in this case scenario is for the benefit of Smith with the fitting of equipment and facilities to fit the condition of Smith. The medical expenses liable to be claimed for tax deductions should include the difference between the costs of pool replacement and the value it adds to the building, and other maintenance costs and medical expenses (Dickinson, 2008).
Conclusion
This paper has analyzed the tax scenario given it is about medical expenses to be claimed. The facts of the case have been determined with the identification of the main issues as the recommendation of the physician, capital expenditure and medical expenses, and the analysis of the authorities. Recommendations have been provided based.
Reference List
Cch Tax Law Editors. (2007). Federal tax compliance manual. New York: CCH Incorporated.
Dickinson, M. (2008). Federal income tax: codes and regulations. New York: McGraw Hill.
Pope, T., Anderson, K., & Kramer, J. (2009). Prentice Hall’s Federal Taxation 2010: Comprehensive. New York: Prentice Hall Publishers.