There is limited tax relief for medical expenses. Itemized deductions are allowable only for medical outlays not covered by insurance or otherwise reimbursed. The big hurdle is that those payments are deductible just for the portion in excess of 7.5 percent of adjusted gross income, or AGI. AGI is the amount listed on the last line of page 1 of the 1040 form after all reportable income is offset by certain deductions, such as alimony payments, but before itemizing for expenditures, such as real estate taxes, and listing dependency exemptions.
In determining whether expenditures surpass the 7.5 percent floor, include amounts spent on medically required improvements or installation of special equipment or facilities in your home. There is no deduction, though, for the entire cost of equipment or improvements that increase the value of your dwelling. Generally, the cap on the deduction is the amount by which the cost exceeds the increase. For example, an allergist recommends the installation of an air-cleaning system for a family member with asthma. The costs aggregate to $15,000 and your home’s value increases by $12,000. The result is an allowable deduction of only $3,000.
Examples of other improvements or equipment that readily pass IRS muster are an elevator or a bathroom on a lower floor that makes things easier for a person with arthritis or a heart condition. More liberal rules apply when doctor-recommended improvements are made by a tenant to rental property—a wheelchair ramp, for instance. Someone who rents gets to claim the entire cost because the improvement adds nothing to the property’s value. Moreover, whether you own or rent, your deductibles include the entire cost of detachable equipment—for example, a window air conditioner that relieves a medical problem. Even when equipment is nondeductible because its cost is less than a home’s increase in value, you may count as deductions amounts spent for operating and maintenance expenses, such as electricity, repairs, or service contracts, as long as the equipment remains medically required.
Just because something like an air conditioner makes you feel better does not mean that the IRS will share the cost. That is why the agency scrutinizes sizable deductions for installations of equipment. Still, there are steps you can take now that will help in case the IRS later indulges in some second-guessing. Make sure to get a statement from your doctor that explains the medical need for your expenditures. Hang on to bills and canceled checks that show what you paid for improvements. Remember also that you may need those records to figure the profit or loss when you sell your home.
When a hefty deduction is at stake, it is also prudent to get a written opinion from a competent real estate appraiser that details how little or how much the installation raised the value of your residence. Should a disputed deduction end up in court, the IRS can bring in its own appraiser. But because of the time lag, usually that kind of appraisal is less convincing. You need not count any appraisal fees under the 7.5 percent rule that trim deductions for medical expenses. Instead, include them in full with your other miscellaneous deductions, such as return preparation fees, which are allowable to the extent that they exceed 2 percent of AGI.
More than one taxpayer has learned the hard way about the importance of before-and-after appraisals. For instance, the Tax Court completely disallowed a write-off for spending on air conditioning because the taxpayer failed to get an appraisal and was unable to show that the air conditioning did not enhance his home’s value.
Julian Block may be reached at email@example.com .