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Home Improvement 2006  

Paying the price

  Once you've attached a price tag to your next project, check out if and how you can afford it.
Medical needs can help pay for remodeling
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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, it can easily check the way in which you came up with your numbers.

The paperwork
The federal government naturally tosses a couple of "gotchas" into this section of the 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 says. Modifications and additions that do not add value can be deducted in full as medical expenses.

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, and a new hard surface floor in the next year, 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-corporation status for your home business to render yourself the eligible employee.

Small home businesses get the advantage of choice, too. 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, Botkin says.

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 office 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 -- your kids' pediatrician won't cut it. Nor can your spouse's doctor toss off a note for you.

"The doctor must actually do an examination and diagnose you," Botkin says. "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 says. "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.

Editorial assistant Leslie Hunt contributed to this story.

-- Posted: April 12, 2006
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