Is paying a WI medical assistance lien a medical expense

[mappp]

Taxpayer is permanently disabled and WI medicaid paid his medical bills and long term care expenses.  A "medical assistance lien" was placed against his house.  The house was sold in 2020 and WI accepted the sale proceeds for the medicaid lien.  Could the client's payment to the state of WI be considered as a medical expense deductible on Sch A?

[BobKamman]

Did the sale of the house cause the taxable income?  Generally Medicaid recipients are nonfilers because they would not qualify if they had enough income to owe tax.  How long since they moved out of the house?  In any case, I don't think Medicaid pays any expenses that do not qualify as medical, so yes it would be deductible.  In some states the amount is based on a pro-rata amount, so everyone pays the same amount regardless of how little or how much is spent on them, but that would still keep it in the nature of an insurance policy.  

[mappp]

Bob, thanks for the response.  I've asked his guardian if he lived in the house for two of the last five years.  I'm not sure how long he's been disabled and unable to live on his own.  WI says they paid over $345,000 in medical expenses and the proceeds of the house sale is $23,000.  But I would consider the taxability of the home sale as a separate issue.  The $23,000 proceeds were paid to the state as required.  I've researched deductible medical expenses, and can't find any reference to the issue of medicaid loan repayment as a deductible medical expense addressed.  Taxpayer is single, still living, just unable to live on his own and is currently in adult care.  The first TY I prepared his return is 2018, so it is possible the home sale would not be taxable. 

[sjrcpa]

There is some rule about getting extra time when you are in a nursing home. see Section 121.

And if the sale price was $23,000, how much gain can there be?

[mappp]

I'm thinking the taxability of the home is separate from the Sch A medical expense deduction.  If he doesn't qualify to exclude the gain because he did not live in the home for two of the last five years, then all the $23,000 would be taxable.  However, even if the gain is not taxable, he didn't get to keep the money.  All the $23,000 went to WI, so does he have a $23,000 medical expense?

[Terry53029 · Accepted solution]

As others have said Yes, as he owned home, home was sold and used to pay his medical bills

[mappp]

Terry, 

Thank you.  Do you have a source I can quote?

Pam

[Just-Lisa-Now-]

What if the seller has to move into a nursing home before the sale, or has resided in and out of health care facilities during the 5 years before the sale? 

Section 121(d)(7) has special provisions about that. If the individual “becomes physically or mentally incapable of self-care” and resided in the home for periods of time that, in aggregate, equal at least 1 year out of the past 5, “then the taxpayer shall be treated as using such property as the taxpayer’s principal residence during any time during such 5-year period in which the taxpayer owns the property and resides in any facility (including a nursing home) licensed by a State or political subdivision to care for an individual in the taxpayer’s condition.”

[Terry53029]

See link: https://www.irs.gov/taxtopics/tc502, This tells you what medical bills you can deduct.

Just look at your clients situation. He owned home. Home was sold, doesn't matter if forced to sell or sold voluntarily. Money from his home was used to pay medical expense, therefore if it was a medical expense allowed in pub 502 it would be a deductible medical expense for your client. As far as sale of home, and using sec. 121 exclusion, see link:  https://www.irs.gov/taxtopics/tc701