Tax Breaks Can Ease the Load
It’s well-known that medical costs can pose a significant financial burden on families, but many people are unaware that Uncle Sam provides a tax break for many types of medical expenses.
The federal government offers a deduction for some of the money you’ve been spending to treat an illness, recover from one or protect yourself from getting sick.
But you may be surprised about what is deductible, and you’ve got to be alert to get everything the law allows.
Medical care, says the IRS, “means amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of diseases, and for treatments affecting any part or function of the body.”
It’s a broad description, and it isn’t restricted to treatments at the doctor’s office or in hospitals. Some examples:
* Your son has asthma and needs a special air-filtration system in his bedroom. If the doctor says this is essential to his health, the cost of purchase and installation are deductible.
* Your aunt, who has diabetes, urgently needs to lose weight to reduce her risk of suffering life-threatening complications. Her internist advises her to join a gym to get exercise under the direction of a fitness professional. The health club membership fee is a deductible item.
* Your mother suffers a stroke and is in a wheelchair. At a substantial cost, you build ramps to the front and rear entrances of her home and widen the interior doorways. A portion of the expense is deductible, depending on whether it increases the resale value of the property.
The IRS offers an example in its helpful booklet (Publication 502: medical and dental): Someone spends $8,000 installing an elevator at home because the person can no longer climb stairs. A real estate appraisal shows the elevator adds $4,400 to the value of the home. The rest of the cost, $3,600, is deductible.
A written opinion from a physician is recommended for taxpayers who want their expenses to qualify for an IRS deduction, according to Ed Moore, president of a financial counseling firm in Fairfax, Va.
“If the doctor says it is medically necessary, then in most cases it can become a deductible expense,” said Moore.
Stop-Smoking Programs Qualify as a Deduction
If the doctor tells you to quit tobacco, you can enroll in a stop-smoking program, and the cost will be deductible. Over-the-counter products, such as nicotine gum and patches, are not deductible.
A cancer patient who lost her hair after chemotherapy treatment can buy a wig, and it will be deductible--if the doctor has stated that the wig is helpful for the patient’s mental health and recovery.
For anyone who wants to take medical deductions, there is an important caveat: You have to reach a certain spending threshold. Medical deductions begin only after costs exceed 7.5% of your adjusted gross income, which can be a substantial amount.
Let’s assume, for example, that Jane Smith has an adjusted gross income of $50,000 a year and medical costs of $3,000. She doesn’t reach the threshold of 7.5%, or $3,750, so none of her costs are deductible for this year. But the next year, Jane needs some minor surgery, and her children get braces. Her income has risen to $55,000, but her medical costs have climbed even more, reaching $6,500. The 7.5% level of her adjusted income is $4,125, so she can deduct all costs above that amount, or $2,375.
The premiums you pay for health insurance also are considered medical expenses. But you cannot take a deduction if you have health insurance at work and pay your share of the premium with pretax dollars.
Self-employed people have a particular advantage. They can deduct 60% of the premiums as a direct deduction on IRS Form 1040. The other 40% can be credited toward calculating the 7.5% limit.
Suppose Earl Martinez is a self-employed business consultant who spends $7,000 a year for health insurance for his family. He takes 60% of that ($4,200) as a direct deduction from his income. The other $2,800 is tallied along with other medical costs and applied against the 7.5% test when he itemizes deductions.
Earl’s son has a severe learning disability and goes to a special school on the advice of the family doctor. The school tuition is deductible, along with costs of special tutors Earl must hire during the summer.
Some areas of tax law are murkier.
Nursing home costs for a taxpayer, spouse or dependent can be considered medical expenses. “If the main reason for being there is to get medical care,” the IRS says, the full cost, including meals and lodging, can be considered a medical expense. Nursing home bills can run $50,000 a year and more.
If John Smith’s mother, Anna, goes into a nursing home, he can consider her as a dependent for the medical-expense deduction if he pays more than 50% of the cost of her support during the year. He can include his share of the nursing home tab along with his other medical expenses in figuring the deduction for his own tax return.
What if John wants to keep his mother living in her own home and is willing to pay for it? There are several steps to getting a deduction. First, a doctor or other licensed health-care professional has to approve a plan of care. The person must need help for at least 90 days with two of the six basic activities of daily living: eating, toileting, transferring (getting in and out of a bed or chair), bathing and dressing.
Hiring someone to help with these activities is deductible medical care.
The full payments to the aide, including salary and taxes, are tax-deductible. If John provides meals for the aide, that cost also is deductible. If John has to hire a live-in helper for his mother to provide these services, and it is necessary to move to a bigger apartment with an extra bedroom for the aide, the increased cost of rent is deductible.
The aide might also provide homemaking services, such as grocery shopping and fixing meals. These are not medical services and therefore aren’t considered deductible. The deductible cost would be prorated to the share of the attendant’s time spent on the medical activities.
Paying for Nursing Home Expenses Via Insurance
Long-term care insurance, an increasingly popular option, will pay for expenses in a nursing home, or for care delivered at home for people who have met the test of needing help with activities of daily living. Premiums for this insurance can count toward the deductible threshold.
The deductible amount varies with age and may be adjusted annually for inflation. For 2001, these limits are: $230 for those age 40 or younger; $430 for those 41 to 50; $860 for people age 51 to 60; $2,290 for those between 61 and 70; and $2,860 for those older than 70.
Sometimes, nonmedical expenses can be deducted on a tax return if they are closely linked to getting the medical care you need. If you had to travel to another city to get specialized treatments at a university medical center, for example, you can deduct transportation and lodging costs.
Train or plane fares, and the costs of a bus or taxi, or driving your own car, may all be permissible deductions. The deductible cost of lodging at a hotel or motel is limited to $50 per person per night. A parent traveling with a sick child, for example, could deduct $100 per night.
For more information, the IRS publication 502, on medical and dental deductions, is available on at https://www.irs.gov.
Older Americans and their families often are baffled by the variety of federal and state programs available for the elderly. Lots of benefits go unclaimed. The National Council on the Aging has created an easy-to-use Web site to help people find out what is available in their local communities. The site’s address is: https://www.benefitscheckup.org.
