Amounts paid for qualified long-term care services are deductible medical expenses.

For purposes of the medical expense deduction, Sec. 213(d)(1)(C) states that the term "medical care" includes amounts pal or qualified long-term care services (as defined in Sec. 7702B(c)). This new rule generally is effective for tax years beginning after 1996.

On May 6, 1997, the IRS issued Notice 97-31, which provided interim guidance on qualified long-term care insurance contracts and qualified long-term care services. The latter are defined as necessary diagnostic, preventive, therapeutic, curing, treating, mitigating and rehabilitative services, as well as maintenance or personal care services (such as meal preparation and household cleaning) required by "chronically" ill individuals and provided under a plan of care prescribed by a licensed health care practitioner (Sec. 770213(c)(1)).

A "chronically" ill individual is one who has been certified by a licensed health care practitioner as:

* Being unable to perform, without substantial assistance from another individual, at least two activities of daily living (ADL) (described below) for at least 90 days due to a loss of functional capacity (the ADL trigger);

* Having a disability level similar to the disability level described in the ADL trigger, as determined under regulations prescribed by Treasury in consultation with the Department of Health and Human Services; or

* Requiring "substantial supervision" to protect the individual from threats to health and safety due to "severe cognitive impairment."

The activities of daily living are eating, toileting, transferring, bathing, dressing and continence (Sec. 7702B(c)(2)(B)). Substantial superviSion means continual supervision by another person necessary to protect the severely cognitively impaired individual from threats to his health or safety. Severe cognitive impairment means a loss or deterioration in Intellectual capacity that is:

* Comparable to (and includes) Alzheimer's disease and similar forms of irreversible dementia; and

* Measured by clinical evidence and standardized tests that reliably measure impairment in the individual's short-term or long-term memory, orientation as to people, places or time, and deductive or abstract reasoning.

Interestingly, services provided for the chronically ill do not have to be those of a registered or trained nurse. The determination of qualified long-term care services does not appear to depend on the caregiver's qualifications but, rather, on the nature of the services rendered. Therefore, if companions or certain more distant relatives (such as cousins) are compensated, a medical deduction may be available for 1997 and later years.

However, under Sec. 213 (d) (11), qualified long-term care services do not include services provided to an individual by:

* A specified relative or spouse (directly or through a partnership, corporation or other entity), unless the specified relative or spouse is a licensed professional with respect to those services; or

* A related corporation or partnership (within the meaning of Sec. 267(b) or 707(b)).

Specified relatives are those described in Sec. 152(a)(1)-(8):

1. Children and their descendants.

2. Stepchildren.

3. Siblings and stepsiblings.

4. Parents and their ancestors.

5. Stepparents.

6. Nephews and nieces.

7. Uncles and aunts.

8. Children-in-law, parents-in-law and siblings-in-law.

Sec. 213(d) (11) does not apply for purposes of the income exclusion for amounts received under a long-term care insurance contract, whether the contract is employer-provided or purchased by an individual. This limitation is unnecessary in these situations, because Congress anticipated that the insurer will monitor reimbursements to limit opportunities for fraud in connection with the performance of services by the taxpayer's specified relative, spouse or related corporation or partnership. Future IRS regulations may alter the guidance contained in Notice 97-31. Accordingly, on Dec. 31, 1997, Regs. Sec. 1.7702B-1 and -2 were proposed, reflecting standards set forth in Notice 97-31. However, these proposals deal only with the consumer Protection requirements that apply to qualified long-term care insurance contracts and the grandfather rules (under which pre-1997 contracts are treated as qualified long-term care insurance contracts if certain conditions are met).