Cecily Slater, CPA
With the start of a new year and with the passage of the Patient Protection and Affordable Care Act, the time is right to review your medical and dental expenses. The role of family caregiver, by its very nature, is one that often places you in a challenging financial position. As a family caregiver, however, you may be entitled to deductions or credits that can help take some of the sting out of filing your tax returns. The following tips should serve as a guide for you to begin thinking about how to maximize your deductions. Tax rules change, so always check with a tax professional when you are getting ready to file.
Medical Expense Deductions: General Principles
For a deduction to qualify as a medical expense, you must have spent money to alleviate or prevent a physical or mental defect or illness. Common deductions include:
• Medical insurance premiums (unless pre-tax)
• Prescription medicines
• Doctors’ bills
• Hospital fees for services and/or room and board
• Travel to and from medical appointments. (The mileage rate for 2010 is 16.5 cents per mile for medical or moving purposes. Note that this rate is significantly lower than the 2009 reimbursement rate.)
Only the medical and dental expenses you paid for during 2010 are included in the total, regardless of when the services were provided. If you pay medical expenses by check, the day you mail or deliver the check generally is the date of payment. If you use a credit card, include medical expenses you charge to your account during the year, not when you actually pay the amount charged.
For 2010 through 2012, you can deduct only medical and dental expenses that are in excess of 7.5 percent of your adjusted gross income (AGI). For example, if your AGI is $25,000 and your medical expenses add up to $2,000, you will be able to deduct only $125. That’s the difference between the $2,000 you spent and $1,875, which is 7.5 percent of $25,000. This is one of the areas affected by the new healthcare law. Beginning in 2013, the floor on medical expenses is increased to 10 percent. In the preceding example, you would be unable to deduct any of the medical expenses since the floor increases to $2,500. Keep this in mind if you are planning on incurring large medical expenses (e.g., dental) or making medically related improvements to your home, as it would be wise to consider making these expenditures in 2011 or 2012.
There will be one exception to the new adjusted gross income threshold: The increase to 10 percent will not take effect until 2017 if either the taxpayer or his/her spouse is age 65 or older. The 7.5 percent will apply to both spouses even if only one is 65 or older.
There’s another catch: You can deduct only those amounts for which you have not been reimbursed by private insurance or Medicare. The new healthcare law eliminates reimbursements under medical reimbursement plans, cafeteria plans, health savings accounts and Archer medical savings accounts for over-the-counter drugs unless prescribed by a medical care provider, effective 2011. If you are in the upper tax brackets, some itemized deductions are phased out altogether. However, deductible medical expenses are not subject to this reduction.
You can claim certain special items as medical deductions. Examples include:
• Oxygen and oxygen equipment
• Special schools or homes for the mentally or physically disabled (when recommended by a doctor)
• Artificial limbs
• False teeth
• Wheelchairs and repairs
• Costs and care of guide dogs for aiding the disabled
• Braille books and magazines if they are more expensive than regular books and magazines
• Hearing aids and the batteries to operate them
• Ambulance service
• Travel costs, including lodging, to receive medical treatment
You can also deduct expenses for equipment or improvements you’ve made to your home for medical reasons, but the IRS will reduce these deductions by the amount such improvements increase the value of your home. If the modification does not increase the value of the home, the expenses are fully deductible. If you are planning on making substantial changes to your home, you should have an appraisal of the property prior to the change and again after the change. This will assist you in determining the amount of the allowable deduction. Costs of maintaining and operating equipment installed for medical reasons may be claimed as a medical expense even if the equipment added to the value of the house. An example of this is the cost of the electricity required to operate an elevator.
Certain structural improvements to accommodate disability are fully deductible without regard to the increased value test. Examples of eligible expenses include:
• Widened doorways and hallways
• Railings and grab bars
• Lifts (but not elevators)
• Warning systems
Unfortunately, health club dues and dancing or swimming lessons are not deductible, even if recommended by a doctor.
You can include in medical expenses the cost of special equipment or hand controls installed in a car for the use of a person with a disability. The difference between the cost of a regular car and a car designed to accommodate a wheelchair can also be included.
Nursing Home Care
Nursing home expenses, per se, are not deductible, but medical expenses incurred in a nursing home are. This includes the cost of meals and lodging while the patient is in the nursing home, so long as the main reason for being there is to get medical (not simply personal) care.
Nursing, Therapeutic, and/or Aide Services
Wages you pay for an attendant who provides nursing and/or personal care services are deductible as medical expenses. These services include such nursing activities as giving medication and changing dressings, and typical personal care services such as bathing and grooming the patient.
If you provide room and board, these may also be deductible, but typical household services such as cooking and cleaning do not qualify as medical deductions. The cost of the attendant’s meals is included in your medical expenses. Divide the total food costs among the household members to determine the attendant’s share.
You can take medical expense deductions for yourself, your spouse, and your dependents. A person generally qualifies as a dependent for medical expense deductions if he or she meets all of the following criteria:
• Is related to you;
• Lived with you for the entire year as a member of your household. (Parents, children over the age of 19, grandchildren, and siblings do not have to meet this requirement.);
• Was a U.S. citizen or resident, or a resident of Canada or Mexico, for at least part of the calendar year for which you are filing taxes; and
• You provided more than half of that person’s total support for the calendar year. If you and someone else are providing more than half a dependent’s support, but no one alone provides more than half, you can use what’s called a “multiple support agreement” to claim the dependent, but only one of the parties to the multiple support agreement can claim medical expenses for the dependent person. (For example, in order to take the medical deduction for expenses of a parent, the adult child must be providing 50 percent or more of the support for the parent. If several siblings combined contribute 50 percent, but no single child pays the 50 percent, a multiple support agreement can be filed with the return and one of the siblings may claim the expenses.) If parents of a child with significant medical expenses are divorced, the child is considered a dependent of both parents for the medical expense deduction.
The Internal Revenue Service offers a number of publications that can help you understand the deductions and tax credits to which you may be entitled. Some of the most helpful include:
• Your Federal Income Tax – Publication 17
• Medical and Dental Expenses – Publication 502
• Tax Guide for Seniors – Publication 554
• Tax Highlights for Persons With Disabilities – Publication 907
• Tax Rules for Children and Dependents – Publication 929
To order these publications, call 800/TAX-FORM or go to www.irs.gov and click on “Forms and Publications.”
The IRS will also answer taxpayer questions if they are not too complicated or controversial. You must realize, however, that while the IRS will try to guide you in finding the answers you need, it does not offer tax advice. To find the taxpayer service number for your area, check the local phone book under the IRS listings.
There is only one place to go for individual tax advice, and that is to a tax professional. If you are confused about what deductions or credits may apply to you, or if you need help preparing your return, you may find it beneficial to consult someone who specializes in this area. There are a number of tax services available and you can find their numbers in the phone book, but the best reference may well be word of mouth. Talk to people you know and respect and ask them for a referral.
Cecily Slater is a certified public accountant who has been providing tax and financial planning advice to individuals and businesses in the greater Washington, D.C., area since 1979.