Tax practitioners are well aware that the population is aging. The U.S. Census Bureau estimates those age 85 and older could number 18 million by 2050. Aging often brings increased health and mobility challenges. The U.S. Department of Health and Human Services Administration for Community Living projects the number of moderately or severely disabled elderly persons will grow to 22.6 million by 2040.Approximately 79% of people who require long-term care live in their homes, according to the Family Caregiver Alliance. This will necessitate additional home modifications to make homes more accessible, safer, or capable of addressing specific health issues. Many clients making these improvements, with guidance and planning, may qualify for valuable home improvement medical expense deductions. These deductions can be substantial and, thus, of interest to even wealthy clients.
Planning for this deduction can create an opportunity for CPA firms to offer aging clients a range of planning and other services. For example, CPAs as trusted advisers can help aging clients safeguard and manage their financial assets by monitoring their bank, brokerage, and other statements. In addition, at some age or level of incapacity, these clients will need someone to provide bill-paying and related services. Few, if any, people are more qualified to provide these services than CPAs.The Home Improvement Medical Expense Deduction
Sec. 213(a) allows taxpayers to deduct expenses paid during the tax year for medical care of the taxpayer, the taxpayer's spouse, or a dependent (as defined in Sec. 152), as long as the expenses are not compensated for by insurance or otherwise and to the extent that the expenses exceed 10% of the taxpayer's adjusted gross income. "Medical care" includes amounts paid "for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body" (Sec. 213(d)(1)). Under Regs. Sec. 1.213-1(e)(1)(ii), deductions for expenditures for medical care allowable under Sec. 213 are "confined strictly to expenses incurred primarily for the prevention or alleviation of a physical or mental defect or illness." An expenditure that merely benefits the individual's general health is not an expenditure for medical care.
Planning to Qualify Expenditures
The costs of home improvements and special equipment may qualify for a medical expense deduction. Qualifying expenses include obvious items such as constructing an accessible entrance ramp, installing a lift, widening doorways to accommodate a wheelchair, and attaching grab bars and handrails. But the range of expenditures that may qualify for the deduction is as broad as the myriad health challenges taxpayers might face. Regs. Sec. 1.213-1(e)(1)(iii), other IRS guidance, and various court decisions provide the requirements that must be considered in determining whether clients may deduct certain improvements as qualifying home improvement expenditures.
No Personal Expenses
A deduction is denied for personally motivated expenses, e.g., those made for aesthetic reasons (Ferris, 582 F.2d 1112 (7th Cir. 1978), rev'g and remanding T.C. Memo. 1977-186; Rev. Rul. 87-106). While this might suggest that painting to change color is purely aesthetic, painting new walls and doors after widening doors should not be viewed as a personal expense since these are logically repairs that have to be made after the door widening.
Reduced by Increase in Home Value
A medical expense deduction for a home improvement is reduced to the extent the improvement increases the value of the related property. Thus, an appraisal of the value of the related property, e.g., the home, should be obtained before and after the improvements are completed. Some improvements may improve a home; others might actually detract from value (e.g., a ramp at the front entryway).
Related Directly to Medical Care
The taxpayer must demonstrate how the expenditure relates to his or her medical care. A letter from a physician can demonstrate the connection between the expenditure and the health condition. While a letter from the client's physician is recommended, the regulations do not require it, so other approaches could be used to bolster the taxpayer's position. Many websites provide information to help those facing health challenges. Excerpts from websites devoted to the client's health condition discussing home modifications may be useful.
For example, the WebMD article "Adapting Your Home for Parkinson's Disease" (Aug. 5, 2014) (available at www.webmd.com), recommends the steps to take to make a home accessible for a client living with Parkinson's disease. Those steps include the following improvements: touchable lighting or those that react to sound; handrails along walls, hallways, and stairwells where there is nothing to hold on to; a stationary pole or "trapeze" bar for those needing help getting out of bed; an elevated toilet seat and/or safety rails to assist standing from a low surface; extended lever handles on faucets to make them easier to turn; grab bars inside and outside the bathtub or shower; bathtub transfer bench or a shower chair with a back support.
Essential Element of Treatment
The Tax Court has held that to be deductible under Sec. 213, an expense must be for an essential element of treatment and would not have otherwise been incurred for nonmedical reasons (Jacobs, 62 T.C. 813 (1974)). If an expenditure fails either test, it is a nondeductible personal, living, or family expense under Sec. 262 (see Rev. Rul. 76-80). The "essential element of treatment" requirement, however, contradicts the statute's intent. Many common improvements that make a residence accessible, or safe, for a client with a disability have nothing to do with the "treatment" of the disease; however, as long as their primary purpose is medical care, these types of expenditures are deductible (see Regs. Sec. 1.213-1(e)(1)(iii)).Identifying the Extent of Qualifying Expenditures
Which Expenses May Increase the Value of a Residence?
One challenge for taxpayers who are making home improvements is identifying how much of the expenditure qualifies for a medical deduction. For example, the costs of installing grab bars in a bathroom would qualify for the deduction. However, the work involved may extend well beyond the mere installation of the grab bars, including removal of the existing tile. If matching the old tiles is impossible, then it may be necessary to retile the entire bathroom. This work might be viewed as being done for "architectural or aesthetic compatibility with the related property," as the court stated in Ferris, and be ineligible for the deduction. However, this interpretation would greatly reduce—really eliminate—the tax benefit for legitimate costs associated with installing the grab bars. Further, when the taxpayer receives the invoice, it may not be reasonable or practical to identify which portion of the cost is only for "architectural or aesthetic compatibility with the related property."
Congress intended that certain capital expenditures that generally do not increase the value of a personal residence should be deductible in full as medical expenses. These expenditures are those made for "removing structural barriers in a taxpayer's personal residence for the purpose of accommodating a physical handicap of the taxpayer (or the taxpayer's spouse or dependent)" (2 H.R. Rep't No. 99-841 (Conf. Rep't), 99th Cong., 2d Sess., II-22 (1986)).
In Rev. Rul. 87-106, the IRS ruled that the following expenditures "generally do not increase the fair market value [FMV] of a personal residence and thus generally are eligible in full for the medical expense deduction when made for the primary purpose of accommodating a personal residence to the handicapped condition of the taxpayer, the taxpayer's spouse, or dependents who reside there":
- Constructing entrance or exit ramps to the residence.
- Widening doorways at entrances or exits to the residence.
- Widening or otherwise modifying hallways and interior doorways.
- Installing railings, support bars, or other modifications to bathrooms.
- Lowering of, or making other modifications to, kitchen cabinets and equipment.
- Altering the location of, or otherwise modifying, electrical outlets and fixtures. Similarly, lowering light switches should all be included.
- Installing porch lifts and other forms of lifts. (Generally, this does not include elevators, as they may add to the FMV of the residence, and any deduction would have to be decreased to that extent.)
- Modifying fire alarms, smoke detectors, and other warning systems.
- Modifying stairs.
- Adding handrails or grab bars whether or not in bathrooms.
- Modifying hardware on doors. A common application of this is replacing regular handles with lever handles.
- Modifying areas in front of entrance and exit doorways.
- Grading of ground to provide access to the residence.
The IRS notes that this list is not exhaustive and if "substantially similar expenditures are incurred to accommodate a personal residence to the handicapped condition of the taxpayer or the taxpayer's spouse or dependents who reside there, those expenditures may be eligible in full for the medical deduction, provided they do not increase the fair market value of the personal residence." However, the IRS warns that "only reasonable costs incurred to accommodate a personal residence to the handicapped condition are considered to be incurred for the purpose of medical care or are directly related to medical care" for purposes of Sec. 213. Practitioners should note that the sources all pre-date the availability of home automation, which opens important opportunities for many with health challenges.Conclusion
Many expenses may potentially qualify as deductible expenses when improvements are made to a taxpayer's home for medical reasons. But it is important that the taxpayer be able to demonstrate how the expenditure relates to his or her medical care and that the deduction be limited to expenses that do not increase the value of the residence. With the increasing number of clients with health and mobility challenges, practitioners should always be aware of the potential for these deductions.
|Theodore Sarenski is president and CEO of Blue Ocean Strategic Capital LLC in Syracuse, N.Y. Martin Shenkman is an attorney in private practice in Fort Lee, N.J., and New York City. His practice concentrates on estate and tax planning and estate administration. Mr. Sarenski is chairman of the AICPA Personal Financial Planning Executive Committee's Elder Planning Task Force and is a member of the AICPA Advanced Personal Financial Planning Conference Committee and Financial Literacy Commission. For more information about this column, contact firstname.lastname@example.org.