Federal Income tax code specifies the generally deductible expenses in the personal taxation of an individual which include medical expenses, certain taxes, mortgage interest, investment interest and charitable contributions. These deductions mentioned in the chapter are known as itemized deductions. It has to be noted that any expenditures not specifically allowed as itemized deductions are not allowable against the personal income subject to tax.
Medical expenses paid out by the taxable individual on himself, spouse and dependents are allowed as an itemized deduction. The additional points to be noted are that the deduction is allowed only to the extent to which the medical expenses are not reimbursed and the deduction is limited to 7.5% of the taxpayers Adjusted Gross Income.
1.0 DEFINITION OF MEDICAL EXPENSES
The definition of medical expenses is very broad to cover not only the expenses incurred for the diagnosis, cure, mitigation, treatment, or prevention of the disease but also covers expenses incurred for preventive health cover and costs of periodic physical and dental examinations of the taxpayer. The important point here is that such deductions are allowed even when the taxpayer is in good health. Hence, such medical expenses incurred for the treatment of diseases affecting any structure or function of the body are termed as medical expenses for the purpose of assessing the income for tax purposes.
2.0 COSMETIC SURGERY-DEDUCTIBILITY
Expenses incurred for Cosmetic Surgery are deductible when the surgery is necessary to
ameliorate
a deformity arising from a congenial abnormality or
a personal injury or
A disfiguring disease.
Any medical expenses incurred on cosmetic surgery for purposes other than those which are unnecessary are not deductible. For example, fees paid to a cosmetic surgeon for a face lift of a person of 75 years age to improve his appearance is unnecessary and hence not deductible. But the cost of restoring the face by cosmetic surgery, which is disfigured in an accident, is deductible.
3.0 DEDUCTIBILITY OF CERTAIN OTHER EXPENSES
4.1 COSTS INCURRED IN A NURSING HOME/HOME FOR AGED
When a person is admitted in a nursing home or home for the aged primarily to get medical care, then the expenses incurred for the nursing home expenses including meals and lodging are allowable as a deduction. However if the primary concern for being admitted to the nursing home or the home for aged is personal, only the expenses paid for medical or cursing is deductible, whereas, costs of lodging and meals are not deductible.
4.2 TUITION EXPENSES
When a dependent is sent to a school having special resources for alleviating the infirmities caused by mental or physical disability, the tuition expenses paid to the school is an allowable deduction. In such cases, the cost of meals and lodging in addition to the tuition fees is allowable.
4.3 MEDICAL EXPENSES INCURRED FOR SPOUSE AND DEPENDENTS
A taxpayer is entitled to claim the deduction in his adjusted gross income of the medical expenses incurred by him on his/her spouse and for a person who is dependent on him/her at the time such expenses were incurred. Again the dependency is to be determined on the basis of certain criteria as spelt out in the Act and the schedules.
4.4 EXPENSES INCURRED ON TRANSPORTATION, MEALS AND LODGING FOR MEDICAL TREATMENT
Transportation costs like bus, taxi, train or plane fare, charges for ambulance services and out of pocket expenses for the use of an automobile for commuting to and from a point of treatment for medical care are deductible. The taxpayer is entitled to choose either a mileage allowance or actual out-of-pocket automobile expenses. Deduction is allowed for the related parking fees and toll charges, whereas the cost of meals, en route are not allowed as a deduction.
Similarly the cost of transportation of a parent accompanying a sick child or a nurse or other attendant accompanying a person who is traveling to get medical care is allowable, provided it is so that the patient can not travel alone and needs an aid to accompany during the journey.
The Lodging expenses which are incurred essentially for medical care, when the medical care is provided by a doctor in a licensed hospital or clinic are allowed as deduction. No lavish or extravagant lodging expenses involving significant element of personal pleasure recreation or vacation in the travel away from home is allowed as deduction. The limit for such lodging expenses eligible for deduction is $50 per night for the patient as well as the person who must accompany the patient.
4.5 ALLOWABILITY MEDICAL INSURANCE PREMIUMS AS DEDUCTION
The maximum limit of 7.5 % of the adjusted gross income of the taxpayer allowable as deduction include the medical insurance premiums, irrespective of the fact that such premiums are paid under a group or individual plan. When the medical insurance premium is paid by the employer such premium is not included in the income of the taxpayer and it cannot be included in the employee’s medical expense either. Insurance premiums paid by a self employed person are allowed as a business income. The premium paid for the spouse and dependents also qualify for deduction. Premiums paid by companies on their employees health care is allowed as business expenditure for the companies concerned.
4.0 DEDCUTION OF CAPITAL EXPENDITURES INCURRED FOR MEDICAL
PURPOSES
When swimming is a part of a medical treatment and there is no availability of a neighborhood pool then the capital expenses incurred on constructing such pool will become eligible for deduction. Similarly a Window Air-conditioner which is not permanent in nature, dust elimination system, elevators and a room built to house an iron lung are some of the examples of allowable capital expenditure. The basic criteria in determining the allowability of such expenditure is that they are required as medical necessity upon the advice of a doctor or physician, the facility is used primarily by the patient alone and the expenditure is reasonable.
Similarly expenditure like constructing entrance and exit ramps to the residence widening hallways and doorways to accommodate wheelchair, installing support bars and railings in bathrooms and other living rooms and adjusting any electrical outlets or fixtures offer themselves eligible for deduction provided that the expenditure is incurred to enable a physically handicapped individual live independently and productively. If a capital expenditure is allowed as a medical expense, then the allowable cost is deductible in the year incurred. All these expenses are allowed subject to the overall ceiling of 7.5% of the adjusted gross income.
5.0 DEDUCTION ARE ALLOWED ON A CASH BASIS
Whatever be the method of accounting adopted by the individual, the medical expenses are deductible on a cash basis. This means that the are deductible only in the year in which they are paid with an exception in the case of deceased person, when the expenses are paid within a year of death then the expenses would be deemed to have paid at the time when they are incurred. Deduction is not allowed currently for any medical expenses that is going to be incurred in the future, subject of course to the exception that the taxpayer has an obligation to pay the fees in advance under the policy of the physician or the institution furnishing the medical care.
Works Cited
“Hoffman, Smith, Wills - Individual income taxes 2007
Chapter 10 pp 10-2 to 10-8
West Federal Taxation (Thomson)