Practical Tax Strategies

May 1999

62 Prac. Tax Strat. 289

LENGTH: 10193 words

SUBJECT: MEDICAL EXPENSES

TITLE: DIAGNOSE PAYMENTS FOR BIGGER MEDICAL EXPENSE DEDUCTIONS

AUTHOR: RON WEST, CPA and Attorney

RON WEST, CPA, LL.M., is a tax professor at Fairleigh Dickinson University in Madison, New Jersey.

HIGHLIGHT: Taxpayers who are eligible for medical expense deductions may be shortchanging themselves by not recognizing the deductibility of some items that qualify for the deduction.

CORE TERMS: medical care, qualify, deductible, medical expense, diet, reimbursement, medical deduction, nursing, disabled, doctor, meal, transportation, prescribed, expenditure, deducted, household, lodging, handicapped, special school, spouse, food, medical expense deduction, chronically, disability, alleviate, handicap, nurse, gross income, impairment-related, long-term

TEXT:

Unreimbursed expenses for medical care may be deducted as a Section 213(a) itemized deduction to the extent that the aggregate amount paid for the year exceeds 7.5% of AGI. (Section 56(b)(1)(B) sets the threshold at 10% for individuals who are subject to AMT.) Only medical expenses paid during the tax year count, regardless of when the incident or event that occasioned the expense occurred and regardless of the taxpayer's method of accounting. *<1> Unlike certain other deductions such as the charitable deduction, the medical deduction is not subject to an annual deduction ceiling. All amounts paid, which otherwise qualify as medical care, can be deducted. Moreover, the itemized deduction phaseout rules do not apply to the medical deduction. *<2>

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*<1> Reg. 1.213-1(a)(1).*<2> Section 68(c)(1).

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The 7.5% floor precludes the great majority of taxpayers from deducting any medical costs. Once the 7.5% threshold is reached, however, every dollar of expenditure that can be identified as qualifying for medical deduction yields tax savings (assuming that the total itemized deductions exceed the standard deduction and also that the taxpayer is not otherwise prevented from itemizing deductions). Tax practitioners can better service their clients who do reach this threshold by having a comprehensive understanding of what items qualify as deductible medical expenses.

Section 213(d)(1) defines medical care as payments made to diagnose, cure, mitigate, treat, or prevent disease, or for the purpose of affecting any structure or function of the body. The expense must be incurred primarily to alleviate or prevent a physical or mental defect or illness. A medical expense need not relate to a specific illness to be deductible. The definition of medical care is broad enough to cover preventative measures, such as physical and dental checkups, even by healthy individuals. Medical care also includes:

- Transportation primarily for and essential to medical care.

- Qualified long-term care services.

- Insurance covering medical care and qualified long-term care.

The most common types of disbursements for medical care are listed in Reg. 1.213-1(e)(ii). They include payments for:

- Hospital services.

- Nursing services.

- Medical, laboratory, surgical, dental, and other diagnostic and healing services.

- X-rays.

- Medicine and drugs.

- Artificial limbs and teeth.

- Ambulance.

Thus, most payments made for items or treatments that help disabled or chronically ill persons compensate for, mitigate, prevent, or alleviate a handicap or disability unique to their personal situation generally satisfy the definition of medical care.

Limitations.Although very broad, medical care is not without limits. Payments that are merely beneficial to, or merely improve general health, such as vacations or a change of climate in winter season and are not related to specific illness or condition are not payments for medical care. Also, payments for any illegal treatment or operations are not deductible. *<3> Illegal is not a reference to the qualifications of the provider but rather a reference to the underlying procedure or treatment itself. Deductibility depends on the nature of the services rendered, and not on the experience, qualifications or title of the person rendering the services. *<4> Thus, payments made to an unlicensed medical provider can qualify as medical care if the person does render the medical care and the treatment itself is not illegal. *<5>

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*<3> Reg. 1.213-1(e)(1)(ii).*<4> Estate of Dodge, TCM 1961-346.*<5> Rev. Rul. 70-170, 1970-1 CB 51.

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Generally, expenses for items ordinarily used for living, personal, or family purposes are not deductible as medical care. *<6> Medical care does not encompass amounts expended on personal toiletries and hygiene supplies, such as toothpaste, and shaving lotions, nor on amounts spent on cosmetics used for ordinary cosmetic purposes, such as face cream, deodorants, hand lotions, etc., or sundry items. *<7> In some instances, however, expenditures for such items may qualify as medical care if they are essentially medical in nature. To qualify as medical care, the item must be used primarily to prevent or alleviate a physical or mental defect or illness. For instance, the cost of a wig purchased on the advice of a physician for the mental health of a patient who has lost all of his or her hair from disease can be a medical expense.

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*<6> Section 263.*<7> Reg. 1.213-1(e)(2).

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When a procedure that is normally viewed as nonmedical is claimed for a medical deduction, the burden is on the taxpayer to show that the procedure satisfies the statute. *<8> This applies to items such as massages, yoga lessons, water filtration systems, and attendance at wellness centers for exercise. When an item purchased in a special form primarily to alleviate a physical defect is one that in its normal form is ordinarily used for personal, living, or family purposes, the excess of the cost of the special form over the cost of the normal form qualifies as medical expense.

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*<8> Huff, TCM 1995-200.

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Example. The cost of a specially designed car that allows a disabled person to drive is $24,000. The cost of a comparable car without the special equipment is $16,000. Only the incremental $8,000 attributable to the special design qualifies as medical care. *<9>

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*<9> Rev. Rul. 70-606, 1970-2 CB 66.

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Numerous rulings and court cases have elaborated on the deductibility of a variety of expenditures as medical care. A checklist of some of the more common deductions sanctioned by the Service are listed in Exhibit 1. A variety of nondeductible medical expenses are listed in Exhibit 2.

Cosmetic surgery.Section 213(d)(9) states that medical care does not include cosmetic surgery directed at improving appearance, but that does not meaningfully promote proper bodily function or prevent or treat illness or disease. Nondeductible cosmetic surgery includes face lifts, hair transplant, electrolysis, or liposuction. Cosmetic surgery or other similar procedures, however, do qualify as medical care when necessary to ameliorate a deformity that arises from or is directly related to a congenital abnormality, a personal injury resulting from accident or trauma, or a disfiguring disease. This includes, for instance, the cost of restorative cosmetic surgery to correct facial disfigurement occurring from a serious automobile accident. On the other hand, the cost of a face lift at age 75 merely to improve appearance is not deductible.

Medicine.Section 213(b) provides that medical care includes amounts paid for medicine and drugs, but only if prescribed and not otherwise illegal. A recent ruling, disallowed a deduction for marijuana, to be used for medical purposes in violation of federal law, even though a prescription was obtained as required under state law. *<10> Amounts paid for medications that are available over the counter, even if prescribed, are not deductible (except for insulin).

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*<10> Rev. Rul. 97-9, 1997-1 CB 77.

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Special foods and vitamins.Generally, the cost of special foods does not qualify as a medical expense. Under a narrow exception, amounts paid for special diets can qualify as medical expense, but only if the diet is prescribed by a physician to treat or alleviate a specific illness and the diet serves as an addition to (a supplement) to regular diet. The special diet cannot in any way be a part of the nutritional needs of the taxpayer. *<11> The deduction is allowed only if the taxpayer can prove a medical necessity for the special diet. The cost of special foods normally consumed by a person to satisfy regular nutritional requirements is a personal nondeductible expense. No deduction is permitted since the prescribed diet merely serves as substitute for a normal, regular diet. *<12> For instance, a diabetic who is prescribed a special diet cannot deduct the food costs as a medical expense if the diet acts as mere substitute for a normal diet that meets nutritional needs and is not prescribed as a supplement to a normal diet. *<13>

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*<11> Von Kalb, TCM 1978-366.*<12> Collins, TCM 1965-209.*<13> See, e.g., Harris, 46 TC 672 (1966).

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The Tax Court has, however, allowed a medical deduction when the diet prescribed for medical purposes is in addition to a normal diet. In such cases, the deduction is limited to the excess cost of the diet over the normal nutritional needs. *<14> For instance, a taxpayer who is on a diet in which protein consumption is doubled, may be able to deduct the incremental cost of the diet over the cost of a normal average protein diet.

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*<14> Nehus, TCM 1994-631 .

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Similarly, no medical deduction is allowed when organic foods are consumed by the person on his own and without medical direction. A deduction will be allowed under certain circumstances for the incremental cost of organic foods over a comparable nonorganic diet when such consumption is medically necessary to alleviate sever allergic reaction to chemically treated or packaged foods. *<15> Generally, when a taxpayer consumes vitamins on his or her own and without a doctor's advice, the cost of vitamins is not deductible. A deduction for vitamins is allowable only when prescribed by a doctor as part of a treatment for a specific ailment and not merely to meet ordinary nutritional requirements. *<16>

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*<15> Randolph, 67 TC 481 (1976).*<16> Neil, TCM 1982-562.

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Transportation.Medical care also includes amounts paid for transportation primarily and essential to obtain medical care. *<17> Transportation expenses to and from doctors, hospitals, and other medical care providers are deductible medical expenses. *<18> Covered expenses include use of automobiles, bus, train, taxis, plane fare, and similar expenses. The cost of meals while traveling to get medical care is not deductible.

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*<17> Section 213(d)(1)(B).*<18> Rev. Rul. 55-261, 1955-1 CB 307.

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DRIVE UP DEDUCTIONS

Only actual car expenses may be deducted, such as the cost of gas and oil. General repair and maintenance, insurance, and depreciation are not deductible. Alternatively, a standard rate of ten cents per mile for 1999 can be used. Under either option, the cost of tolls and parking is added.

When transportation expenses incurred by the taxpayer qualify as deductible medical expenses, transportation costs incurred by a companion whose presence is medically necessary are similarly deductible. For instance, the transportation expenses of a parent who must accompany a minor child needing medical care would be deductible, as would the expenses of a nurse or other person providing assistance to one who cannot travel alone.

Commuting expenses incurred by handicapped persons to and from work are not deductible as medical expenses, even if the medical condition requires an unusual means of transportation. *<19> A handicapped taxpayer with an artificial leg could not deduct as medical expense the cost of using his car to commute to work even though he could not use public transportation. *<20> The same was held for a taxpayer afflicted with infantile paralysis. The use of an auto that is primarily for and essential to rendition of medical care, however, is deductible. Thus, a taxpayer who could not walk because of spinal injury could deduct the cost of using his car to commute to work because his doctor recommended employment and commuting as the therapy. *<21>

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*<19> Rev. Rul. 67-76, 1967-1 CB 70.*<20> Coopersmith, TCM 1971-280.*<21> Weinzimer, TCM 1958-137.

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The cost of various equipment, such as hand controls, adapted so that a physically handicapped person could operate the car is a deductible medical expense. *<22> Similarly, the excess cost of a specially designed auto is also deductible as a medical expense. *<23> The operating and maintenance costs of such specially designed autos, however, are not deductible medical expenses. In contrast to specially designed cars, the full purchase price and operating costs of wheelchairs and autoettes (a special vehicle equipped for a handicapped person) qualify for a medical deduction since these items are used primarily to alleviate a handicap and not mainly as transportation. *<24>

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*<22> Rev. Rul. 66-80, 1966-1 CB 57.*<23> Rev. Rul. 70-607, 1970-2 CB 9.*<24> Rev. Ruls. 66-76, 1966-1 CB 238, and 66-80, supra note 22.

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Although a deduction for local transportation usually presents no problems, distant travel is more problematic. Transportation expenses to a distant location qualifies as a medical expense only if the trip is medically necessary for the treatment of a specific ailment (and not for general health). *<25> The cost of moving to a warmer climate is not deductible if the move is merely to improve general health and is not primarily related to medical care. Also, distant travel is not deductible as medical care if it is primarily for personal pleasure. For instance, transportation to Florida by one suffering from heart disease to live in warmer climate is deductible if medically necessary and prescribed by a doctor. On the other hand, moving to a warmer climate based on doctor's advice is not deductible if the taxpayer moves to and from the warmer climate at different times of the year.

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*<25> Bilder, 369 U.S. 499, 9 AFTR2d 1355 (1962).

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No deduction is allowed for medical expenses that are reimbursed by insurance or otherwise within the same year as payment is made. *<26> The amount that would otherwise qualify for a medical deduction is reduced by the reimbursement, whether made to the taxpayer, doctor, or other medical provider. Anticipated or expected reimbursements that will not materialize until the following year do not reduce deductible medical expenses. Instead, the reimbursement of prior year expenses are accounted for separately in the year of receipt. It is only the net unreimbursed expenses that can be deducted. A taxpayer who voluntarily does not file an insurance claim must reduce the medical expense by the available reimbursement. *<27> The burden is on the taxpayer to establish that the amount deducted is unreimbursed expense. *<28>

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*<26> Reg. 1.213-1(a)(3).*<27> Ltr. Rul. 8102010.*<28> Cooper, TCM 1987-334.

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No medical deduction is allowed when total reimbursements for expenses incurred during the year exceed the total medical expenses for that year. If the taxpayer paid the entire premiums for medical insurance, none of the excess reimbursements for the year are included in income. If, however, a portion or all of the premiums were paid by the employer and were not included in gross income, a portion of the excess reimbursements are includable in income in the year of receipt. Reimbursement made in a later year, after the medical expense has already been deducted, must be reported as income in accordance with the tax benefit rule.

Types of payments.Questions often arise as to whether certain types of receipts are reimbursements that reduce medical expenses:

- Payments received from health insurance and Medicare are reimbursements.

- Payments received under an accident insurance policy also are reimbursements, but only if the payment is designated as indemnification for hospital and medical care. *<29>

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*<29> Rev. Rul. 56-18, 1956-1 CB 135.

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- Payments received for loss of earnings, such as disability payments are not reimbursements, except to the extent that part of the payment is designated for medical costs. *<30>

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*<30> Deming, 9 TC 383 (1947), acq.

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- The portion of personal injury awards specifically allocated to future medical expenses represents reimbursement. *<31> No future medical deduction is allowed until the full allocated portion of the award has been offset. When a personal injury award is silent as to any allocation, none of the award is reimbursement, and the Service may not apportion any of the award to reduce future medical expenses. *<32>

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*<31> Rev. Rul. 75-232, 1975-1 CB 94.*<32> Niles, 710 F.2d 1391, 52 AFTR2d 83-5580 (CA-9, 1983), aff'g 520 F. Supp 808, 48 AFTR2d 81-6068 (DC Calif., 1981).

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PLANNING TIP

Individuals involved in a personal injury suit should avoid a specific allocation of the recovery for medical expenses. Any lump-sum physical personal injury award can be excluded from gross income in full and, if no specific allocation is made toward future medical expenses, a medical deduction may be had for the portion of the award used to pay for otherwise-deductible medical expenses.

If a personal injury award is for past medical expenses, however, part of it is treated as a reimbursement regardless of whether the award specifies any amount as representing reimbursement for past medical expenses. That portion is includable in gross income to the extent the prior medical expenses were deducted and resulted in a reduction of income, according to Rev. Rul 75-230, 1975-1 CB 93.

Payments may also be received under an employer's accident and health plan. Whether such payments are reimbursements depends on the underlying reason for the benefit. Benefits under an employer accident and health plan that are intended to compensate for a permanent loss or loss of use of a body member, a bodily function, or some permanent disfigurement are not includable in gross income. *<33> Nor are such amounts considered reimbursements of medical expenses. Thus, medical expenses are not reduced by any such excludible benefits. *<34> Different results apply, however, when an employee receives payments under an employer accident and health benefit plan that are intended to reimburse for medical care expenses. Such payments are reimbursements that reduce currently paid medical expense or are includable by the employee in gross income to the extent of previously deducted medical expenses. *<35>

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*<33> Section 105(c).*<34> Section 105(f); Reg. 1.213-1(a)(3)(ii).*<35> Section 105(b).

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A medical expense deduction is available only for expenses that are paid for the taxpayer, his spouse, or dependents. An individual who may not otherwise qualify for the dependent exemption deduction may, nonetheless, qualify as a dependent for purposes of the medical deduction. Normally, to qualify another individual as a dependent for purposes of the exemption deduction, five tests from Sections 151(c) and 152 must be met:

(1) More than half support provided.

(2) Relative or member of household.

(3) Gross income of less than the exemption amount.

(4) The individual did not file a joint return.

(5) Citizenship or residency tests.

Only three of these five requirements, however, must be satisfied to qualify someone as a dependent for purposes of medical deduction. These requirements, in Section 152, consist of the support, relationship or member of household, and the citizenship or residence test. Neither the gross income nor the joint return filing test in Section 151 needs to be satisfied. *<36> Once a person qualifies as a dependent for medical deduction purposes, a variety of expenditures incurred on behalf of such individual that otherwise would not be deductible, such as special schools and nursing care, may become deductible as medical expenses. A taxpayer is entitled to itemize otherwise deductible medical expenses for a person who qualified as a dependent either when the medical care was provided (incurred) or when paid. *<37>

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*<36> Reg. 1.213-1(a)(3)(i).*<37> Reg. 1.213-1(e)(3).

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Example. Mother pays medical expense for Son, who is a 20 year-old college student. Son files a joint tax return with his spouse. Mother provides over half of Son's support for the year. Assuming Mother meets all the other tests to qualify Son as her dependent, Mother can itemize the medical expenses paid for Son on her tax return, even though for all other purposes Son fails the dependency test because he files jointly with his spouse. Mother could also claim the medical expenses paid for son on her return even if Son could not be claimed as a dependent because he is 22 years old, earns $8,000 and is not a full-time student.

With respect to a child of divorced parents, either parent can deduct medical expenses paid for the child if either or both parents together provide over half of the child's support. *<38> The child can be treated as a dependent of both parents for medical expense deduction purposes no matter which parent qualifies for the dependency exemption.

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*<38> Section 213(d)(5).

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Often, a household having a disabled individual may include live-in help, such as a nurse or housekeeper. Regardless of the value of room and board furnished to such assistant and notwithstanding that such assistant is a member of the household, neither a dependency exemption nor medical deductions may be claimed for such individual.

TAX PLANNING FOR DEPENDENTS

Medical payments made on behalf of a dependent generally should be made directly to the medical provider, rather than to the dependent who would then make the payment, for two reasons: