New Client & Ch 13

[Margaret CPA in OH]

A new client asked me to extend their return and said they likely owed nothing or a small amount. I extended with no tax due. I finally got the documents. They owe about $1300 at least in part because one son filed for himself unexpectedly.

The real question relates to deductions. I asked about medical bills and was told that they are still paying on their now deceased (other) son's bills but had to file Ch. 13. No debt was forgiven but payments are managed through a mediator. The deceased son (really sad story, 20 years old, died of brain cancer, WAS a dependent for tax purposes in 2007) was covered by some insurance for catastrophe (dad's policy, he's a mail carrier) but thousands of dollars were not covered. Since much of this was paid in 2008, is any deductible? Must they have been paid in the same year as treatment? How does Ch 13 fit into this? I've never had one before.

Thanks for any help!

[RoyDaleOne]

Most likely a cash basis taxpayer, therefore, the deductions are deductible in the year paid. Sad, but that is all there is to it.

[TAXBILLY]

Page 3:

http://www.irs.gov/pub/irs-pdf/p502.pdf

taxbilly

[Margaret CPA in OH]

Thanks to you both. I was hoping that expenses paid in 2008 would be deductible for 2008 and pub. 502 says yes. I still don't grasp how Ch 13 fits into this. Guess I will have to see the documents they have and the arrangements for payments first. Thanks again.

[jainen]

>>one son filed for himself unexpectedly<<

That does not affect their tax liability. If he is a dependent, he is a dependent regardless of how he files.

>>20 years old<<

Can we assume they did not consult a lawyer in filing the bankruptcy? They probably have no legal liability for the bills of another adult, regardless of tax status.

[Margaret CPA in OH]

Thanks for your comments, Jainen. The surviving son did not qualify as a dependent in 2008; I think they were hoping he did but he lived on his own, made more than $10,000 and they did not provide more than 50% of his support, etc.

The deceased 20 year old was most certainly their dependent. He became ill originally just prior to high school graduation and never made more than a couple thousand dollars as he played in a band. He lived at home and was in treatment (chemo, radiation, etc.) repeatedly. He was covered under dad's insurance (as a dependent) to the limits but the bills greatly exceeded the limits.

I don't know whether they consulted an attorney. I should find out more in the next few days when the court and other documents are provided. The client said that no bills were forgiven just that they had to pay through an intermediary set up, I believe, by the court. That is my problem. I am unfamiliar with the effects of Ch 13 and whether these medical bills would be deductible. I don't know how a fixed monthly payment through an intermediary would be allocable, if at all.

It's for sure they never consulted anyone regarding the tax ramifications of anything. Then again, going through a 2 year struggle with a son's terminal brain cancer and the massive grief ensuing death, well, I am not so sure I would be fully functioning either.

I hope to have more details soon. I just don't know anything about Ch. 13 and need to get educated really soon!

[TAXBILLY]

Based on the facts presented I don't see what you mean by the affect of bankruptcy. If they agreed to pay the medical bills then those payments would be deductible.

taxbilly

[Margaret CPA in OH]

That's what I was thinking, too, Taxbilly. My question also relates to a fixed payment monthly covering all outstanding debt, medical, credit card and who knows? How would I determine the medical expense portion? A simple ratio? Or perhaps in the documents it is specified as to dollar amounts going to specific creditors. And what about the payments being made through an intermediary?

When I get the documents, hopefully, I will have a better grasp of the situation. I just wondered, having had not prior experience, if there was any effect with the Ch 13.

Thanks again for replying. Perhaps I should have waited to ask any questions here. Sorry to have used up so much brain power and time prematurely!

[TAXBILLY]

They probably pay a fixed amount per month. When I was in the hospital last year my bill was about $180,000 for six weeks and I didn't have insurance. The hospital, if it takes federal money, must consider a request for charity which perhaps your client should look into. They cut my bill in half and I pay them $500/month.

taxbilly

PS

Don't worry about brain power and time this time of year. Most of us are still recovering from the tax season! :~)

[Jack from Ohio]

Don't worry about brain power and time this time of year. Most of us are still recovering from the tax season! :~)

I sold mine for carbon offset credits!! :blink: