To print article, click Print on your browser's File menu.

Go back


Advertisement
The Basics
Improve your financial health with medical deductions
"Bunch" your medical deductions into a single year. Know what qualifies as a medical deduction. Follow these tips and the IRS will help pay for your recovery.
By Jeff Schnepper

It won’t make you feel any better physically, but you can ease your financial pain if you plan your medical expenses properly.

Medical expenses are allowed as miscellaneous itemized deductions (“below-the-line” deductions). You can’t take the standard deduction and deduct medical expenses as well.

Bunch your expenses
Your medical expenses must exceed 7.5% of your adjusted gross income before any expenses are allowed. For example, if you have an income of $100,000, the first $7,500 in medical expenses don’t count. That means you should “bunch” your medical deductions into a single year.

Some expenses can be accelerated or even deferred. For example, if I’m over the 7.5% floor, I might want to accelerate payments for orthodontia or surgery into the current year. Alternatively, if I see that I’m not going to exceed the 7.5% requirement, I might want to pay December’s medical bills in January of the next year. That way I’ll have a chance to get a deduction in that year.

Strategies for self-employed
If you’re self-employed, you can qualify for the self-employment health insurance deduction. This allows you to deduct part of your health insurance premiums even if you don’t itemize. (It’s an above-the-line deduction.)

If you’re self-employed and pay your own health insurance premiums, 60% will be deductible in 2001, 70% in 2002 and rising to the full 100% in 2003. Until then, there are other ways to increase how much you can deduct.

If you’re self-employed but not incorporated, you can hire your spouse to work in your business, pay him or her a minimal salary and include all of your dependents in a group health insurance policy. All of those premiums would be deductible as employee benefits. Moreover, you could declare yourself as the dependent of your spouse. The IRS has approved this structure and allows the full deduction so long as the spouse performs legitimate business functions.

Medical services are deductible
Medical care involves payments for a wide array of services, including acupuncture, medically prescribed foods and even a water fluoridation device if prescribed by the doctor. It does not include, however, payments for "cosmetic" surgery.

Included in this pot of medical expenses are all payments for the diagnosis, cure, relief, treatment or prevention of disease. Medical transportation is included at actual costs or 12 cents a mile. Also included are insurance premiums that you pay for health and medical care.

Sophisticated tax planning involves knowing how to structure your personal expenses so that they qualify as allowable medical deductions. There are several deductions that aren’t readily apparent to the average taxpayer.

For example, elastic stockings qualify as a medical expense if needed by an infirm or elderly person. The costs of a sacroiliac belt, expensive blood pressure medication and a blood sugar test are allowed. Travel to Alcoholics Anonymous meetings, based on medical advice, is a deductible medical expense.

Deducting home improvements
Payments for special equipment installed in a home or improvements made for medical reasons may be deductible even if they improve your home’s value. However, only the amount in excess of the increase in value may be deducted as a medical expense. For example, assume you have a heart ailment and on your doctor’s advice you install an elevator in your home so you don’t have to climb stairs. If the elevator costs $1,000, but it only increases the value of your property by $700, the $300 excess is deductible as a medical expense when paid. Moreover, if the expense qualifies as a medical expense, any amount paid for the elevator’s upkeep or continued operation also qualifies as a deductible medical expense.

Other deductible expenses have included the cost of special equipment used to display subtitles on the television set of a hearing impaired individual and home improvements made to accommodate yourself or a family member with a physical disability. Such home improvements have included special entrance/exit ramps, widened doorways, special railings and support bars, special kitchen cabinets and equipment, modified stairs, fire alarms and other warning systems, and grading of ground to provide access to your home.

Therapeutic deductions
Assume you’re disabled, with arthritis and a bad heart condition. You can’t climb stairs or get into a bathtub. On your doctor’s advice, you install a bathroom with a shower on the first floor of your house. These expenditures, to the extent they cost more than the increase in value to your house, are fully deductible.

Even if you fail to file a claim under an insurance policy that would have covered your medical expenses, those expenses that you pay are still deductible.

Deductions have been allowed for extraordinary forms of medical equipment. For example, the costs of oxygen equipment and oxygen to alleviate breathing difficulty, even the cost of a reclining chair recommended by a doctor for a person with a cardiac condition have qualified as medical deductions. So, too, have special mattresses and certain thicknesses of plywood boards prescribed for an individual who had arthritis of the spine.

Huge medical deductions can be obtained if your doctor can find an ailment in you, your spouse or your dependents that would require you to have a whirlpool for baths or central air conditioning to provide pure, dehumidified air. Even the cost of a swimming pool may be deducted if it is installed because of a doctor’s recommendation to alleviate your physical condition.

If such a swimming pool is used for a specific medical purpose -- for example, to provide hydrotherapy -- a deduction is allowed not only for the installation, but also for the cost of its upkeep, including chemicals, cleaning, water and utilities. (The installation would be a capital expenditure and therefore only the excess cost over the added value to your property is deductible.)