The write-off diagnosis
you plan to grow old in your house, you'll need to have your home change as
your body does. If you end up needing a wheelchair, you'll need doorways wide
enough to accommodate it. Respiratory problems might require air conditioning
or special filters.
Remodel it right and the tax deductions will come.
The Internal Revenue Service offers write-offs for homeowners
forced to make medically related alterations, although like most things IRS,
"these things aren't necessarily written in English," says Scott M.
Estill, a former IRS senior trial attorney who now operates his own law practice
in Littleton, Colorado.
As author of "Tax This!: An Insider's Guide to Standing Up
to the IRS", he helps taxpayers unravel the mystery. If you can say, "but
for the medical condition, I would not have made this home improvement,"
you have a deduction.
Homeowners envision people bound to a wheelchair or a cerebral palsy child on
crutches receiving the break. But temporary health setbacks count, too. If multiple
broken bones require a wheelchair ramp and landscaping to make it blend with
your house, to get you through the next four months, Uncle
Sam allows it. It's worth noting however, that if the home improvement adds
value to the home, the medical deduction becomes the difference between the
inflated value of the house and the cost of the upgrade. For instance, the IRS
generally rules that adding an elevator for wheelchair use elevates a home's
value. Modifications and additions that do not add value can be deducted in
full as medical
The possibilities are wider than you think. Here are some of the
more common deductions for improvements that accommodate a handicapped condition:
- entrance/exit ramps
- widening doorways
- installing elevators or chair lifts
- modifying stairs and/or installing special handrails throughout
- modifying/lowering kitchen cabinets to accommodate a wheelchair
- installing air filtration/air-conditioning systems
- bathroom modifications to accommodate the disabled
- grading grounds outside the front door to provide easier access
to the home
- modifying/adding new warning systems such as smoke, fire and
health alert calling systems
- lowering light switches to wheelchair height
- modifying electrical outlets
- swimming pools, whirlpool or Jacuzzi tubs -- but only if there
aren't less expensive alternatives, such as using the neighbor's pool.
- re-doing drywall to remove mold
Homeowners can't abandon common sense in this smorgasbord, however.
For starters, says Sandy Botkin, CPA, CEO of the Tax Reduction Institute and
author of "Lower Your Taxes, Big Time," you must make the improvement
to alleviate or address a specific medical condition. Generally overweight won't
work, but obesity meets the medical criteria. Aching joints won't get you as
far as an official case of arthritis.
And only the treatment counts, so if your physician prescribes
a filter to eliminate pollen in your home but you buy an entire central air-conditioning
system, only that filter is deductible.
"The IRS is most likely to challenge big expenses like elevators,
outdoor decks and swimming pools -- improvements that also could be done for
nonmedical reasons," warns Estill. "It's like when the IRS audits
a business. They're not after advertising and telephone bills. They look at
meals, entertainment, travel -- things that have a lot of fun associated with
That's not to say swimming holes are an automatic audit flag,
but writing off a $20,000 pool on a $40,000 income might attract unwelcome attention.
So if you intend to deduct, cross all the Ts on the paperwork.
Second, make sure you secure a note from the doctor stating that
water therapy is critical to your treatment or recovery, not simply that you
need to get exercise, Estill adds.
"The more long term the illness or disability, the more likely
the IRS will permit it," he says. "If you say, 'I put in a swimming
pool because I have a three-month rehabilitation program after surgery,' good
luck. I won't make you any guarantees if I represent you in that one."
Third, keep the reins on the expense sheet. Botkin shakes his
head at the couple who ordered European tiles to match their home's décor,
went whole hog on the surrounding deck, splurged on automation and ran up a
"The tax court only allowed the reasonable cost of the pool.
End of story," he says.
Your best bet: Attach your doctor's recommendation for the improvement,
along with an appraisal of your house showing the increase of its value with
the improvement, to the tax return, says Botkin. That way, if the IRS doubts
some of your claims, they can easily check how you came up with your numbers.
The federal government naturally tosses a couple of gotchas into this tax code.
You may only subtract the expense that exceeds the improvement's increase to
your house value. So if you do add an $8,000 swimming pool that raises your
home value by $5,000, you write $3,000 on the tax line.
The good news is that it's the big-ticket items that affect the
home's value. Architectural changes like widening doors or installing a few
windows or guardrails normally don't impact the appraisal, Botkin assures.
Next, your write-offs must exceed 7.5 percent of your annual adjusted
gross earnings, which include interest, dividends, wages, rents, pensions, net
income from businesses, moving expenses and retirement funds. According to Estill,
that threshold isn't as daunting as it seems in years when an illness drops
Botkin advocates smart tax planning to maximize your potential
deductions when you face a long-term or permanent condition. Instead of dribbling
out an elevator here, a ramp there, a new hard surface floor in the next room,
bunch them into one calendar year.
Even better, establish a legitimate full-time or part-time home
business to skirt the 7.5 percent rule. This status allows you to hire the person
in your household with special medical needs and set up a deductible
self-insured medical reimbursement plan that refunds employees any medical
expense the insurance plan won't cover, says Botkin.
However, you still must obey the house rules and reimburse only
the difference between the final cost of the improvement and the increase in
the home's net worth. If you don't have a spouse to hire, you will need to establish
C-Corp status for your home business to render yourself the eligible employee.
Small home businesses get the advantage of choice, too. Says Botkin,
if you use your hammer and nails to make improvements that comply with the Americans
With Disabilities Act, you can take a 50 percent credit on all eligible
expenses between $250 and $10,250.
Medically related write-offs require Schedule A itemization. If
you take the small-business ADA route, you also must file Form 8826.
To get your ducks in a row, make sure you have a doctor's prescription
for the improvement written on his official letterhead. General practitioners'
signatures hold up, so don't worry about chasing a specialist to sign off, says
Botkin. However, the family doctor must be the physician who treats you -- the
kids' pediatrician won't cut it. Nor can your spouse's doctor toss off a note.
"The doctor must actually do an examination and diagnose
you," Botkin adds. "You'd be surprised how many cases the IRS gets
where the doctors never saw the patient."
If your medical condition is temporary, Estill recommends keeping
cost comparisons tucked away with the construction receipts and doctor's note
"The IRS doesn't require them but it's always something I'd
use in an audit situation," he says. "I could make the case that if
my client hadn't put in this $3,000 improvement, he couldn't live in the house
for those three months. Therefore he'd incur the cost of renting an apartment
on the ground floor, which qualifies for a medical expense and would have cost
Overall, tax experts urge, if your motivation is right and you
can support the claim, deduct.
"I'm not suggesting you make stuff up, but if you think it's
a gray area, why not claim it?" Estill asks. "If you are in that 1
percent of Americans who are audited, you still have a better than 50/50 chance
of having the IRS accept your medically related deduction."
Connie Kurtz, a U.S. Treasury enrolled agent, agrees. "It's
a lenient area," she says.
Bankrate editorial assistant Leslie Hunt contributed
to this story.
-- Updated: March 14, 2006