Home Improvements as Medical Deductions

Originally published in the Cedar Street Times

September 6, 2013

Unless you have a tax favored plan such as a Health Savings Account, Flexible Spending Account or the like, you have probably found that medical deductions have generally eluded your tax returns.

The main reason for this is the floor of 7.5 percent of your adjusted gross income which your medical expenses must exceed before even one dollar becomes an itemized deduction.  This floor of 7.5 percent is now ten percent starting with the 2013 tax year.  If you or your spouse are 65, you get a grace period through the end of 2016 to remain at 7.5 percent.  If either of you turn 65 before 2016 you will then qualify for the 7.5 percent rate for that tax year and any subsequent ones through 2016.

Due to the high threshold, many people do not even bother to track the expenses, especially, if they make a decent income.  If people are close to the threshold, one common strategy is to bunch expenses into one year to get as high of a deduction as possible in that year.

Something else to be aware of, is that some improvements to your home, which can be substantial in cost, are considered medical expenses if medically required.  For people in the grace period through 2016 of 7.5 percent, it would be good to think about having any of these types of improvements done before 2017 in order to yield the greatest tax benefit.

So what types of improvements can qualify as medical expenses? Well, if the primary purpose is to serve the medical needs of you, your spouse, or your dependent, then just about anything could qualify.   (You should be prepared to provide supporting documentation that your healthcare provider agrees with your needs assessment.)  The catch, however, is that if the improvement increases the value of your home, you have to deduct the increase in value from the amount you spent to arrive at your deductible portion.

But how in the world do you know the exact answer to that question?  Short of having before-and-after appraisals prepared, it could be a bit of an arm-wrestling match with the taxing authorities if ever questioned.  Fortunately, however, the IRS has come up with a list of items in Revenue Ruling 87-106 which they have agreed generally will not increase the value of your home (thus fully deductible), and they will rarely pursue if done for medical reasons.  These items include installing entrance or exit ramps or lifts, regrading the land to provide access, widening doorways and hallways, modifying stairs, installing railings or support bars, lowering kitchen cabinets, moving electrical outlets and fixtures, modifying smoke alarms and other warning systems, or modifying door hardware.  Other similar modifications can also be fully deductible, but are not specifically listed.

One sticky area is that additional cost to satisfy personal motivations such as architectural or aesthetic compatibility with your existing home is not deductible.  In other words, if throughout your house you have ornate solid gold hand railings, and you need some additional ones installed for handicapped purposes, the IRS is only going to let you deduct what it would have cost to put in some ugly, basic aluminum railings!  They don’t care about things blending in: it is purely a functional consideration.  I suppose you may have a legitimate argument if a strict architectural review board refuses to allow you to build something that doesn’t blend well.  I would save all documentation regarding a rejection.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

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