Deducting special care facilities and educational costs as medical expenses.

Jim and Nancy Smith's son, David, has been released from a drug treatment hospital. On recommendation from his doctor, David immediately goes to live in a halfway house for one month, to assist him in making the transition from the hospital to community life. The Smiths' 1995 unreimbursed costs for the halfway house fees, lodging and meals amount to $5,600.

In addition, because of the effects of drugs and resulting treatment, David is diagnosed as having learning disabilities. Jim and Nancy decide it would be best to send David to a private school because the teacher/student ratio is much lower than in public schools and the school offers private tutoring. The private school tuition costs incurred by the Smiths for 1995 are $4,000.

Issue

Are the Smiths entitled to a medical deduction in 1995 for expenditures made to the halfway house and the private school?

Analysis

Amounts paid to maintain an individual in a therapeutic center for drug addiction are deductible medical expenses. Also allowed are the costs, including meals and professional fees, for an individual admitted to a halfway house on a transitional basis for purposes of adjusting to a normal community life. The rationale for this deduction is that the halfway house has the resources, including counselling, for treating a mental disability, and the treatment is provided at the advice of the individual's doctor.

The costs incurred for David's halfway house treatment are therefore deductible as medical costs, provided that David's doctor prescribed such treatment and the medical reason for being there exists during the entire stay.

Ordinary education costs do not qualify as medical expenses; however, the cost of care and supervision, or treatment and training, of a mentally or physically challenged individual at an institution may be a deductible medical expense. The person's condition has to be such that the resources of the institution for alleviating the disability are the principal reason for that person's presence there. in such a situation, the medical deduction for the cost of attending a special school includes the cost of meals and lodging and the cost of ordinary education provided that is incidental to the special services furnished by the school. For example, the costs of sending a blind child to school primarily to learn braille or sending a deaf child to school primarily to learn lip reading are deductible.

No deduction is allowed for amounts paid to send a problem child to a special school to obtain the benefits of its course of study and disciplinary methods. The IRS has consistently and successfully denied medical deductions for the costs of sending individuals to schools not within the regulations' meaning of "special." The key is whether the education has not had a direct or proximate therapeutic effect on the individual. Private schools providing no medical care, or only incidental medical care, will not qualify.

The Smiths and David's doctor may consider attendance at the private school as a mandatory part of David's treatment; however, unless the school has a program to treat disabilities, it will not qualify as a special school.

The Smiths can achieve a better result by enrolling David in a school that teaches ordinary education but has as its main function the treatment or alleviation of a disability. The key to qualifying the tuition costs as a medical expense is that the educational services must be incidental to the medical care. Another alternative would be to enroll David in a school that provides ordinary education, but has special programs or counseling for disabled students. In this case, that portion of tuition costs allocable to the special programs or counseling would be a deductible medical expense.

Conclusion

The Smiths are entitled to a medical deduction (subject to their adjusted gross income limitation) for the amounts expended for David's halfway house treatment. These costs are considered necessary medical care costs and part of the ongoing doctor-prescribed treatment for David's addiction.

The amounts expended for private school tuition are not a deductible medical expense; the school provides ordinary education and is not set up for medical care purposes. Instead, the Smiths should enroll David in a school that has medical care as its primary function, but also includes ordinary education as part of its curriculum.

Editor's note: This case study has been adapted from PPC Tax Planning Guide -- Individuals, 5th Edition, by Elizabeth DiTommaso, Helen Gardner and Terry W. Lovelace, published by Practitioners Publishing Company, Fort Worth, Tex., 1993.