Elderly or disabled clients may incur substantial medical expenses relating to the modification of their house to meet medical needs. A modest tax benefit, which can be obtained to offset some of this cost, may be a welcome break that makes the improvements more affordable. To obtain this tax benefit, the costs of the home modifications have to meet general medical expense deduction rules. Then, in addition, the cost of the improvements has to meet additional requirements discussed below.
To qualify for a medical expense deduction generally, payments for medical bills have to be incurred "primarily to alleviate physical or mental defects or illnesses". Payments for your general health, are not deductible. Your client must actually pay the bill in the particular tax year in order to deduct it in that year. If the client pays by check, the date the client mails or delivers the check determines the year of the tax deduction. For credit cards, it is the date your client’s charge appears on his or her credit card bill, even if paid in a later year. Advise clients in all cases to save cancelled checks and credit card receipts to prove any deductions. If an insurance company pays for an expense, or reimburses your client, the client cannot deduct the amount paid or reimbursed. He or she can only deduct the amount actually paid over the reimbursement.
Your client may be able to deduct the cost of special home equipment and special home improvements if the main purpose is your client’s medical care. If the improvements made to the house qualify, the client can deduct their costs as a medical expense on Form 1040, Schedule A. Unfortunately, the total of the client’s medical expenses is only deductible to the extent that it exceeds 7.5 percent of his adjusted gross income. To qualify for this deduction, the expenditures must be: (1) reasonable; (2) incurred for medical care or directly related to medical care; (3) capital in nature (permanent, lasting improvements, not mere repairs); and (4) not increase the fair market value of the house. Expenditures made for personal reasons do not qualify. The expenditures must be for the benefit of the client deducting them or that client’s spouse or dependents.
Deductions can be taken for many types of improvements made to the house for medical reasons.Specific types of improvements that have been allowed by the IRS have included installing elevators, inclinators, or lifts for a person suffering from heart disease, adding air conditioning for a person suffering from severe allergies or breathing difficulties, and specially built swimming pools for persons suffering from polio. The costs of widening doorways, building handrails, and modifying cabinets may all qualify. Note that the full amount of these expenses is not necessarily deductible, but only the excess of the expense over the resulting increase in the fair value of the house.
Physically handicapped persons can deduct the expenses incurred to remove structural barriers in their houses, including constructing ramps, lowering, or modifying kitchen cabinets, adjusting electrical outlets for easier use, and installing railings, and support bars.
Example: Your client spends $10,000 to add a wheel chair ramp to the front porch, and an elevator to the home. The home was worth $350,000 before and $353,000 after these improvements. The $10,000 expenditure is reduced by the $3,000 increase in the home's value, providing a $7,000 tax deduction.
If your client’s expenses are significant, recommend that the client have the house appraised before and after the improvements. Since improvements to the home to accommodate a disability generally don't increase the value of your home the least costly and safest approach may be to have a local realtor provide you a before and after valuation. The cost will be modest compared to a formal appraisal, but far more persuasive than ignoring the issue until your client is audited.
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