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The write-off diagnosis

If 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.

Ground rules
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 expenses.

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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 the house

  • 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 them."

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 $195,000 bill.

"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 paperwork
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 your income.

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 as well.

"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 more."

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


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