Health care and the tax law.
With health care expense constituting a sizable portion of most taxpayer's discretionary income, it should be no surprise that the medical and health care deduction issue arises regularly during an IRS audit. In most cases, the IRS seeks to challenge major expense deductions that on the surface are considered a "medical expense" to the average American taxpayer. In fact, improper implementation or tax planning can result in an oversight of established Internal Revenue law. The result - a successful denial of health and medical care expenses by the IRS.
Unfortunately, the denied deduction is often the result of the improper timing of the deduction, an unsubstantiated expenses or the stretched application of the Internal Revenue Code. On a few occasions, the denial occurs because no specific authority exists directly on point and tax professionals have relied on their professional judgement and the facts and circumstances of the client's situation. Two central health care issues that appear to be regularly confronting tax professionals are the proper year in which to allocate a deduction and the inclusion of legitimate long term health care expenses and related insurance premiums as medical deductions.
Deductibility of Medical (and
As a cash basis taxpayer, only those medical and dental expenses paid - regardless of when the actual service is performed - during the tax year may be considered includible deductions. If the medical expenses are paid by check, the date the check was mailed or delivered is the recognized date of payment for tax purposes. However, with the now widespread use of computer bill payment programs and other "banking-by-phone" services, different rules apply. As a result, the payment date for these situations is quite different. If the expenses are paid via one of these on-line services, the date the payment was "made" is considered to be the date reported on the taxpayers monthly statement by the financial institution. In addition, medical expenses charged on a revolving line of credit or other credit card must be included in the year the actual charge was made (when the liability of repayment occurs). The date of the charge on the credit card's monthly account statement may be used to determine the time the expense was incurred. This is true regardless of when the actual debt is to be repaid.
The taxpayer who claims medical and dental expenses as a deduction holds the burden of proof as to his or her right to the deduction. This includes the burden of proving that the medical expenses were not compensated for by an insurance provider or otherwise. A taxpayer must be able to furnish the name and address of each person to whom medical and dental expenses have been paid, as well as the amount and date of the payment.(1) If these payments were in property or services instead of money, this fact must be stated.
These claims for deductions may have to be substantiated. When requested by the IRS District Director or his or her representative, a statement or itemized invoice from the recipient must be furnished. The statement or invoice must show the nature of the service rendered and the specific purpose of the procedure or expense, in addition to the other already required information.
Medical expenses for special dietary requirements (those necessitating special foods or beverages) generally are deductible. However, the deduction is limited to the difference between the cost of these special foods and the costs of regular foods that the taxpayer normally would have had to incur.(2) In addition, a medical care expenditure which is in the form of a permanent improvement to a taxpayer's property is only deductible to the extent its costs exceed the amount by which the fair market value of the property is increased as a result of such improvements.(3) In either of these cases, it is the taxpayer's sole responsibility to prove both what was spent and the amount that must be subtracted in arriving at the proper deduction.
Health Care and Insurance
Internal Revenue Code Sections 213 (d) (1) and (2) provide that deductible "medical care" expenses are amounts paid: a. For the diagnosis, cure and mitigation,
treatment or prevention
of disease, or for the purpose of
affecting any structure of function
of the body; b. For transportation primarily for
and essential to medical care referred
to in subparagraph (a); c. For insurance covering medical
care referred to in both (a) and (b)
above, and; d. For certain lodging away from
Qualified expenses paid for "medical care" include those paid for the purpose of "affecting any structure or function of the body."(4) Mitigative medical care by definition includes costs for hospital services, diagnostic and healing services, X-rays, prescribed medicine, drugs and nursing services. In short, medical care includes any expense incurred to safeguard or improve the health of an individual. This view point is supported in several places by Treasury Regulations (see e.g., Reg. 1.214-1(e) (1) (ii)). No time limit has been placed on the duration of required medical care, nor has a dollar limit been placed on the deductibility of any medical related expenses (except being subject to the 7.590 of AGI floor).
Extended medical treatment can cause complex issues to arise during tax planning. Although any individual can claim legitimate medical expenses as deductions, individuals with extended care requirements may have a difficult time when it comes to separating personal expenses from allowable medical expenses.
In the past, if the taxpayer shows that the medical expenses, nursing services or health assistance are required a legitimate medical purposes, the deduction will be allowed. Fortunately for taxpayers, these health assistance and nursing services need not be performed by a registered or trained professional. Services performed by a companion or other person, including a member of the taxpayer's or patient's family, qualify if they are of the type that meed Code Section 213's definition of medical care.(5) In addition to the traditionally accepted nursing services, such services can include help: in and out of bed, with walking, grooming, dressing, bathing and services to prevent falls and injuries. Deductible expenditures for nursing services include: social security taxes, medical insurance, unemployment taxes, and board and lodging (to the extent the taxpayer made out-of-pocket expenditures directly attributable to lodging and board so long as the attendant is not the taxpayer's spouse).(6)
Long-Term Care Facilities
Where an individual is required to be placed in a medical institution and because of his or her medical condition, the availability of medical care is a principal reason for his or her presence there, the entire expense for this medical supervision may be deductible. If the meals and lodging are furnished as a necessary incident to such care, the entire cost of medical care and meals and lodging at the institution constitute an expense for medical care. It is important to note that these "incidental" services can only be furnished while the individual requires and is undergoing continual medical care.(7) Similarly, the costs of care and supervision or of treatment and training for an individual with a recognized disability at a medical institution, are within the meaning of the term "medical care." Otherwise, the amounts deductible for meals related to the costs of medical care are only 80% deductible, as required under Section 274 (n) (1) (a).
When an individual is in a medical institution and his or her condition or disability is such that the availability of medical care is not a principal reason for his or her presence there - perhaps for family or personal reasons - only that part of the costs that relate to and are attributable to medical care can be considered as a cost incurred for medical care; meals and lodging at the institution in such a case are not considered incidental to the cost of medical care and as such would not be deductible under Code Section 213. For example, an individual is in a home for the aged for personal or family considerations and not because he or she requires medical or nursing attention. In this case, medical care consists only of that part of the cost for care in the home which is attributable to medical car or nursing attention furnished to him or her. The other "incidental" costs are not considered medical care expenses. This exception will most likely rule out the deductibility as a medical expense of retirement homes and communities. However, the facts and circumstances of the long term care requirements of each individual will be deciding factors as to the includability of these expenses.
When a life-care facility is considered, the deductibility of the expenses are magnified. For this purpose, a life-care facility is the rest of that individual's life. The same rules discussed above also apply to these life-care facilities when determining whether the expenses are considered deductible. (That is when an individual is in an institution because his or her condition is such that the availability of medical care will safeguard or improve his or her health is a principal reason for his or her presence there, and meals and lodging are furnished as a necessary incident to such care.) Thus, the entire cost of medical care and meals and lodging at the institution will constitute an expense,for medical care.(8) For example, medical care includes the entire cost of institutional health care for a person who has become mentally ill and unsafe when left alone. Similarly, the cost of care and supervision, or treatment and training, of a mentally retarded or physically handicapped individual at an institution is within the meaning of the term "medical care."
A problem will arise when the taxpayer enters the facility for continued medical care, but after an extended stay recovers sufficiently from his or her condition as to no longer be considered under "continuous care," however, decides for personal reasons to remain at the health care institution. For example, an individual remains after recovering from a stroke in a home for the aged for personal or family considerations and not because he or she requires medical or nursing attention. In such cases, the expenses previously fully deductible are no longer allowed. Only the percentage of the expenses associated with the medical care aspect of his long-term care may now be deducted.
In these cases, the IRS and the Tax Court have determined, without consideration of the costs of treatment, or other expenses for the specific taxpayer/patient involved, that the fraction of the total fees paid to the facility, equal to either: (a) the portion of fees that the facility historically used to provide medical care divided by the entire fee or (b) all the facility's direct medical expenses divided by its total expenses constitutes the proper deduction.(9) Fractions of both upfront fees and of subsequent monthly fees are allowed as medical care deductions under these rules.
For most practical purposes, the total premiums paid for medical and health insurance are deductible.(10) In fact, these premiums have been allowed as deductions for all taxable years after 1967, as long as the expenditures are for insurance covering expenses of medical care defined in Code Section 213. Thus, this regulation will allow the deductibility of health and medical insurance premiums, but not insurance for life or loss of limb coverage.
Under this general rule, problems will only arise when considering the deductibility of long-term health care premiums that include life care facility coverage. If the insurance company only covers the individual entering into such a facility for a principal medical reason, the deductibility of the premiums can be as high as 100%.
However, if the policy covers the costs of long-term care and care facilities regardless of the reasons for such care, this same individual can include as medical expenses only the part of the premium that is properly allocable to medical care.
In short, if the policy to enter the facility for any reason other than a principal medical purpose, the premium costs may only be partially allowable. It is therefore important analyze the insurance coverage and/or operating policies of the insurance company to guarantee proper allocation of medical expenses.
(1) Reg 1.213-1 (h) (2) Wallace, Henry, (1971, CA8) 439F2d. 757; Fleming, Homer, TC Memo 1980-583 (3) Van Kalb, Leona, TC Memo 1978-366 (4) Reg 1.213-1 (e)(1)(i) (5) Dodge, Est, TC Memo 1961-346; Levy Jr. TC Memo 1961-296 (6) Marantz, Est, TC Memo 1979-463; Rev Rul 57-489 (7) Reg 1.213-1 (e)(1)(v)(a) (8) Rev Rul 69-499, 1969-2 CB 39; Reg 1.213-1 (e)(1)(v) (9) Rev Rul 76-481, 1976-2 CB 82; Rev Rul 75-302, 1975-2 CB 86 (10) This article does not consider the tax treatment of medical insurance premiums paid by self-employeds, partners, and S Corporation owner-employees under Code Section 162(1)