IRS updates offer deductible medical expenses
Most veterinarians are used to client jokes about deducting the family pet on the personal tax return.
Surprisingly, sometimes veterinary medical services can be deducted as an itemizable medical expense on Schedule A.
Late last year, the IRS released the updated 2000 version of publication 502, Medical and Dental Expenses, which lists the various procedures and expenses that now qualify as deductible.
Since many of the expenses described in publication 502 would not normally be covered by a health insurance plan, keeping abreast of these changes may provide additional deductions that would have been otherwise foregone.
Guide dogs or other animals to be used by a visually-impaired or hearing-impaired person are listed. The law provides that a taxpayer may include in medical expenses the cost of such an animal. Additionally, a dog or other animal trained to assist persons with other physical disabilities may also be deducted. Specifically, amounts paid for the care of these specialty-trained animals are also medical expenses.
This allowance means that veterinary fees charged for the medical care of assistance animals can be deducted as a medical expense by the taxpayer claiming the dog or animal as a deduction.
So, whose medical expenses can you include on your return?
You can include medical expenses that are paid for yourself and certain other individuals. Medical expenses paid for your spouse can be deducted if you were married either at the time your spouse received the medical services or at the time you paid the medical expenses.
If, however, you live in a non-community property state and file a separate return from your spouse, you and your spouse can only include medical expenses that each of you actually paid. Medical expenses paid out of a joint checking account in which you and a spouse have an interest are considered to have been paid equally by each of you.
If you file separate returns in a community property state, medical expenses paid out of community funds are divided equally. If medical expenses are paid out of separate funds of one spouse, only the spouse who paid the medical expenses can include them.
Medical expenses can be deducted when paid for a dependent. The person must have been a dependent either at the time medical services were provided or at the time you paid the expenses. You can include the medical expense of a dependent even if you cannot claim that person as an exemption on your return. Other rules apply for children of divorced or separated parents, support claimed under a multiple support agreement, and certain deceased individuals such as a spouse or dependent.
The various rules are too lengthy to cover in the scope of this article, but can be reviewed in publication 502 or with your accountant.
How much expense?
Unfortunately, not all of the medical expense paid during the tax year is itemizible as a deduction.
The rules state that you can only deduct the amount of your medical and dental expense that is more than 7.5 percent of your adjusted gross income (AGI). For example, say your adjusted gross income is $100,000; then, 7.5 percent of AGI would be $7,500. If you paid medical expenses of $10,000, only $2,500 would be allowed as an itemized deduction, the amount in excess of the $7,500 base.
When are expenses included as a deduction?
In general, time of payment is operative. The fact of when an expense was incurred may not have bearing, although there are situations where the courts have found that an expense might be deducted in a year other than when it was paid. But, for the most part, the deduction is taken when payment occurs.
For this reason, plan ahead on when medical bills will be paid. Especially, if you can foresee many expenses bridging over two years, you might wish to defer payments on some bills until the second year so that the consolidation of expenses can gain the biggest deduction by maximizing the amount in excess of the 7.5 percent of AGI base.
When paying medical expenses by check, the day you mail or deliver the check is generally considered the date of payment. If you pay by telephone or online, the date reported on the statement of the financial institution showing when the payment was made is considered the date of payment.
You can pay medical expenses on a credit card. The year in which the charge is made is the year the expense was paid. It does not matter when the credit card bill is paid itself.
For that reason, any of your clients with a guide or assistance animal may be able to accelerate a deduction by veterinary bill payment with a credit card if they do not have the funds readily available for check or cash payment at the end of the year.
What are examples of other expenses beyond assistance animals that might be allowed as deductions? Surprisingly, there are a number of very expensive items that can be included. For example, significant home improvements that are made on a doctor's advice to accommodate a medical condition may be allowed to a certain extent.
Costs for home improvements that are directly related to medical care are deductible to the extent they exceed the increase in the fair market value of the home resulting from the improvements.
For example, you install an elevator in your home because of a dependent's disability. Installation cost is $8,000. Say the value of your home increases $3,000 because of the elevator now permanently installed in it. In this situation, $5,000 of cost in excess of the increase in fair market value could be a medical deduction.
Other examples of deductible expenses
Alcoholism: Payment for inpatient treatment at a therapeutic center, meals and lodging provided by the center during treatment for alcoholism can be deducted.)
Transportation costs paid to attend meetings of Alcoholics Anonymous in your community pursuant to medical advice, can be deducted.
Birth control pills
Vehicle: The cost of special hand controls and other special equipment installed in a car for the use of a person with a disability may be deducted. Also the cost amount of a vehicle specially designed to hold a wheelchair that is in excess of a regular vehicle without the special amenities can provide a deduction. However, the cost of operating a specially equipped car cannot be deducted.
Contact lenses and eyeglasses
Laser eye surgery: Amounts paid for surgery, such as radiokeratotomy, are deductible, if done primarily to promote the correct function of the eye and improve vision.
Fertility enhancement: Deductible medical expenses include the cost of procedures to overcome the inability to have children, including in vitro fertilization and temporary storage of eggs or sperm. Also, surgical procedures to reverse prior surgery that prevents you from having children is a deductible expense.
Learning disabilities: Tuition fees paid to a special school for a child who has a severe learning disability caused by medical or physical impairments can be deducted, if the child's attendance at the school is recommended by your doctor. Tutoring fees paid to individuals specially trained and qualified to work with children with severe learning disabilities can be a deduction if the tutor is engaged on your doctor's recommendation.
Lifetime care: advance payments. You can include in medical expenses a portion of a life-care fee paid either monthly or as a lump sum under an agreement with a retirement home. The amount of payment to include is the portion that would be allocable to the medical care. The agreement must stipulate that you pay a specific fee as a condition for the home's promise to provide lifetime care that includes medical care.
Medical conferences: Amounts paid for admission and transportation to a medical conference when the conference concerns a chronic illness of you, your spouse or your dependent can be deducted. The cost of the medical conference must be primarily for and necessary to medical care. You must spend the majority of your time at the conference attending sessions on medical information. Cost of meals and lodging are not deductible as a medical expense.
Transportation: Amounts paid for transport primarily for and essential to medical care can be deducted as a medical expense. For example, bus, taxi, train, plane fares or ambulance service would all be allowed if they fulfilled the "primary for" and "essential to" requirements. The transportation expenses of a parent who must chaperone a child who needs medical care would also be allowed. Transportation expenses of a nurse or other aid who can give injections, medications or other treatment required by a patient, traveling with the patient could be deducted.
For car expenses, you can include out-of-pocket expenses for the car such as gas and oil, but not depreciation, insurance, general repair or maintenance expenses. Alternatively, use a standard rate of 12 cents per mile (year 2001 rate) for use of the car for medical reasons. Also track parking fees and tolls, as these can be used under either method.
Weight loss programs: In the case of an existing disease (such as heart disease) a physician may direct you to engage in a weight loss program. In such circumstances, the expense of such a program becomes a deductible medical expense. Cost of weight loss programs for the purpose of weight control and maintaining general good health is not allowed.
Medical information plan: Amounts paid to a plan that keeps medical information so that it can be retrieved from a computer databank for medical care is a deductible expense.
Sterilization: Medical expenses include the cost of legally performed operations to make a person unable to have children.
Legal fees: Legal fees necessary to authorize treatment for mental illness can be deductible. Legal fees for management of a guardianship estate, for conducting affairs of a mentally ill person, or for other fees that are not necessary for medical care are not deductible.
Tuition: Any charges for medical care that are included in the tuition of a college or private school are deductible as long as the charges are stated separately in a tuition bill.
Transplants: A transplant recipient can deduct payments made for surgical, laboratory and transportation expenses for a donor or a possible donor of an organ. A donor or a possible donor may deduct such expenses if he or she pays them.
Stop smoking programs: The amount paid for a program to stop smoking is a deductible expense. Amounts paid for drugs that do not require a prescription such as nicotine gum or patches, are not deductible.
There are other potentially deductible expenses described in Publication 502. If you believe you will be over the 7.5 percent of AGI limitation, obtain a copy and review it to capture all possible expenses.
Track when expenses are actually paid, as this will have a bearing for the year of deductibility. For large investments, such as extensive renovations of a home related to special features required by a medical condition, talk with your CPA. Since home construction can span a few years, some careful planning may be necessary to ascertain when and how to claim deductions related to improvement expenses in excess of fair market worth.