What are the IRS's Rules on Lost Tax Records?

Tax tips
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In five previous columns, I discussed my use of “tax tidbits” to enliven conversations when talking taxes with clients or speaking to groups like retirees and home sellers. The tidbits discuss amusing court decisions and tactics that trim taxes for this year and even provide a head start for next year.

I‘d like to share more of my favorites with you here.

Here's a question I hear often: Can we file jointly and also claim itemized deductions on Form 1040’s Schedule A for mortgage interest and real estate taxes on our home when I’m the only one who reports income and the house is held in my wife's name only?

The answer: Yes. The Internal Revenue Service says that it’s okay for a married couple to file jointly, even if only one of them reports income. What’s more, you don’t lose out on the deductions for interest and taxes enjoyed by owners of homes merely because title to your residence is held in the name of a spouse who reports no income.

Here are a few other topics I'd like to touch on: 

Tax Reform: As part of their unending quest for fairness, our elected representatives periodically overhaul the Internal Revenue Code, all in the name of reform. At the Senate Finance Committee hearings on the 1986 version, known officially as the Tax Reform Act of 1986, Senator Max Bacus of Montana noted that “[t]he last time this committee met to review the tax code from top to bottom, Eisenhower was president, Joe DiMaggio was married to Marilyn Monroe and there were no major league baseball teams west of Kansas City.”

Inevitably, there are largely silent winners and vocal losers; reform, said Senator Russell Long of Louisiana, means “Don't tax you, don't tax me. Tax that fellow behind the tree.”  Senator Steve Symms of Idaho cautioned, “When Congress talks of tax reform, grab your wallet and run for cover.”

Internal Revenue Service Rules on Lost Records Stretch Only So Far: As a general rule, IRS revenue agents and office auditors require taxpayers to substantiate their deductions for business expenses like travel and entertainment with “adequate records”—diaries, for instance.

But the IRS tells its examiners that they should make some exceptions. Among other things, they will waive the record-keeping requirements and accept “reasonable reconstructions" when, according to the agency's administrative regulations, records were lost "due to circumstances beyond the taxpayer's control, such as destruction by fire, flood, earthquake, or other casualty." Those regulations include a cautionary reminder that whether an event was beyond a person's control depends on the particular circumstances.

Medical Care Deductions for Lodgings: Keep careful records of your medical care deductions include lodging expenses while away from home. Generally, meals and lodgings are deductible as medical expenses only if they are incurred in a hospital or similar institution.

Formerly, that restriction eliminated any deduction for the cost of a stay at a hotel while away from home to obtain outpatient treatment at a hospital—for instance, chemotherapy for cancer patients. This held true even when outpatient care was less expensive than inpatient and also when the patient was incapable of traveling alone and had to be accompanied by another person, as in the case of an infant accompanied by a parent.

Now, however, the law allows a deduction of up to $50 per day for away-from-home lodgings to receive outpatient treatment. To qualify, such lodgings must be “primarily for and essential to medical care provided by a physician” in hospitals or similar facilities, such as the Mayo Clinic in Rochester, Minnesota, or the Hospital for Special Surgery in New York City.

But no deduction at all is allowed for hotel rooms or other lodgings that are “lavish or extravagant under the circumstances” or if there’s any “significant element of personal pleasure, recreation or vacation in the travel away from home.” Put more plainly, no tax break is allowed for what’s actually a vacation. Moreover, outlays other than lodgings, such as food, remain nondeductible.

Look for more tidbits in four future columns.

Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 300 and counting). 

About Julian Block

Julian Block

Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes” (Wall Street Journal), and “an authority on tax planning” (Financial Planning magazine). More information about his books can be found at julianblocktaxexpert.com

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