With an aging population, higher income tax rates and more clients trying to live at home than in facilities, the medical expense deduction for home improvements could be increasingly important to clients in coming years. This may be so in spite of the high hurdle for medical expense deductions.
Increase in Number of Elderly Clients
The number of Americans over age 65 is estimated to increase to 71.5 million by 2030. In the year 2000, those over age 65 constituted 12.4% of the population. By the year 2030 it is estimated that those over age 65 will constitute 19% of the population. Americans 85 and older are the fastest growing demographic group. The U.S. Census Bureau projects that the population age 85 and over could grow from 5.5 million in 2010 to 19 million by 2050.
Increase in Number of Elderly that are Disabled
As clients age, and live longer, the incidence and duration of disabilities and health challenges will grow. So the statistics in the preceding paragraph about aging, understate the magnitude of change practitioners will experience in advising clients.
“Of critical importance are the number and proportion of our elderly population that will be disabled...the number of disabled persons at all levels of disability would grow rapidly between 1986 and 2040…the number of those severely or moderately disabled would more than triple during this period...Moreover, there is the possibility of a combination of high life expectancy with increased disability ratios. These assumptions result in a massive increase in the projected number of moderately or severely disabled elderly persons by 2040. The number would grow from about 5.1 million in 1986 to 22.6 million in 2040, or nearly 350 percent; the elderly population overall would grow by only 175 percent.”1
Clearly planning for the challenges of aging and disability will be an increasingly important component of most practices.
It is not Only Elderly Who Face Disabilities
37% of those who are disabled are 64 years of age and younger (3.7 million). 2
The lifetime probability of becoming disabled in at least two activities of daily living or of being cognitively impaired is 68% for people age 65 and older. 3
Most Disabled Clients Live at Home
Most people—nearly 79%—who need long-term care live at home or in community settings, not in institutions. Agency for Healthcare Research and Quality. Long-term care users range in age and most do not live in nursing homes: Research alert. Rockville: Author, 2000, cited at https://www.caregiver.org/selected-long-term-care-statistics.
New Practice Opportunities
The aging of the population will present many new practice opportunities. One example will be advising clients to plan to maximize the deduction for the costs incurred on making their homes accessible.
Overview of the Home Improvement Medical Expense Deduction
Home improvements may qualify as a medical expense deduction. Your client may be able to deduct the cost of special equipment and home improvements if the main purpose is his or her medical care. These can include: adding an accessible entrance ramp, installing a lift, widening doorways, building handrails, modifying cabinets, etc.
No deduction is permitted if the expense was for personal motives, such as aesthetic reasons. The deduction is also limited if the improvements increase the value of the home, Revenue Ruling 87-106, 1987-2 CB 67. Since this Ruling is one of the few authoritative sources about this deduction, it is explored in detail below.
These general guidelines, however, leave wide open a myriad of practical issues practitioners will have to address. The detailed discussion following will narrow these issues somewhat. Unfortunately, the lack of more detailed guidance will still leave much to the practitioner’s judgment.
Authorities
Some of the authorities on this specific planning matter include: a regulation, one Revenue Ruling, and a few cases. Each is explored below with comments and planning suggestions.
Treasury Regulation Section 1.213-1(e)(1)(iii)
Section 1.213-1(e)(1)(iii) of the regulations provides, in part:
“Capital expenditures are generally not deductible for Federal income tax purposes. See section 263 and the regulations thereunder. However, an expenditure which otherwise qualifies as a medical expense under section 213 shall not be disqualified merely because it is a capital expenditure. For purposes of section 213 and this paragraph, a capital expenditure made by the taxpayer may qualify as a medical expense, if it has as its primary purpose the medical care (as defined in subdivisions (i) and (ii) of this subparagraph) of the taxpayer, his spouse, or his dependent. Thus, a capital expenditure which is related only to the sick person and is not related to permanent improvement or betterment of property, if it otherwise qualifies as an expenditure for medical care, shall be deductible; for example, an expenditure for eye glasses, a seeing eye dog, artificial teeth and limbs, a wheel chair, crutches, an inclinator or an air conditioner which is detachable from the property and purchased only for the use of a sick person, etc. Moreover, a capital expenditure for permanent improvement or betterment of property which would not ordinarily be for the purpose of medical care (within the meaning of this paragraph) may, nevertheless, qualify as a medical expense to the extent that the expenditure exceeds the increase in the value of the related property, if the particular expenditure is related directly to medical care. Such a situation could arise, for example, where a taxpayer is advised by a physician to install an elevator in his residence so that the taxpayer's wife who is afflicted with heart disease will not be required to climb stairs. If the cost of installing the elevator is $1,000 and the increase in the value of the residence is determined to be only $700, the difference of $300, which is the amount in excess of the value enhancement, is deductible as a medical expense. If, however, by reason of this expenditure, it is determined that the value of the residence has not been increased, the entire cost of installing the elevator would qualify as a medical expense.”
Analysis of Treasury Regulation Section 1.213-1(e)(1)(iii)
Some of the key concepts suggested by the Regulation include:
1. “Which would not ordinarily be for the purpose of medical care” – this confirms that a broad category of expenditures may qualify.
2. “Exceeds the increase in the value of the related property” – As illustrated in the Regulation an appraisal or analysis of the impact of the improvements on the value of the property must be made. While practitioners often favor certified MAI appraisals on real estate matters the cost may be prohibitive and even exceed the tax benefit involved. Further, a local residential real estate broker that is active in the particular neighborhood where the client lives and made the improvements is likely to have the best knowledge of the impact on value. Courts have recognized and respected the valuation opinions of local brokers. The Ferris Court (see discussion below) is one example: “based upon the testimony of Mr. Geib, a real estate appraiser in Madison, we are convinced that the hypothetical [36 T.C.M. 768] structure would not have enhanced the value of the related property and probably would have decreased it.” 4
3. It is also interesting to note that the Regulation does not address any other impact but value. So even if an improvement makes the residence more saleable, e.g., as an added feature, that does not necessarily correlate with an increased value. Some expenditures might actually reduce the value of the home. For example, if a ramp were built in lieu of steps to the front door, some buyers may view that as a reduction in the home value as they might believe that they would have to restore the front of the home to its prior design. The Regulation does not appear to permit a netting of values. So if the ramp decreases the home’s value but an elevator increases the home’s value, can the two offset each other in applying the test? Perhaps if all of the improvements are part of a single plan to make a residence accessible the impact on value might be considered as one aggregate figure.
4. Related directly to medical care – the taxpayer should corroborate how the improvement/expenditure relates to the medical care of person involved. Likely a letter from a physician might be an important corroboration of the connection. Other approaches may also be feasible as the Regulation does not mandate a physician letter. There is a substantial body of literature, on the internet, in books, research papers and the like, that discuss how to make a home accessible. A more specific source of information might be to consult websites serving people with a particular disease, disability or challenge. Charities exist to serve a wide number of specific diseases and these charities often create resources to help those with the specific disease. So if a client has Parkinson’s disease for example, a website from one of the many Parkinson’s disease charities may have specific recommendations as to actions that can be taken to make a home accessible. WebMD and similar sites also have articles addressing these issues. The advantage of this approach to corroborate (or perhaps preferably supplement the corroboration provided by a letter from an attending physician) is that they are specific to the particular challenges the client has. For example the following information was identified by a google search for “home modifications Parkinson disease, from which the following items were excerpted: 5
Three tips for adapting your living room and bedrooms:
a. Invest in touchable lamps or those that react to sound.
b. Install handrails along walls, hallways, and stairwells where there is nothing to hold on to.
c. Objects such as a stationary pole or "trapeze" bar can be installed if you have difficulty getting out of bed.
Four tips for adapting your bathroom:
a. Use an elevated toilet seat and/or safety rails to assist standing from a low surface. Do not use towel racks or bathroom tissue holders to help you stand.
b. Put extended lever handles on faucets to make them easier to turn.
c. Install grab bars inside and outside the bathtub or shower.
d. Use a bathtub transfer bench or a shower chair with a back support.
5. “Taxpayer is advised by a physician” – the Regulation does not mandate a physician letter but it certainly is suggested.
Revenue Ruling 87-106 and Analysis
Much of the actual language of this seminar Ruling is reproduced below with comments and analysis added following the actual language of the Ruling. The comments and analysis are indented to differentiate them. The language from the Ruling is not presented in quotation marks as in some instances it is paraphrased or shortened.
The issue addressed in the Revenue Ruling is what capital expenditures incurred to accommodate a residence to a handicapped condition of the taxpayer, the taxpayer's spouse, or one of the taxpayer's dependents, are deductible in full under section 213 of the Internal Revenue Code.
The term “handicapped” obviously predates more appropriate descriptive terms. The term is defined according to one internet dictionary site as “having a condition that markedly restricts one's ability to function physically, mentally, or socially.” 6 There seems no reason to conclude that a restrictive definition is intended by the Ruling so that any chronic disease or health challenge that would warrant a home modification should qualify.
The Ruling provides the following analysis of the law concerning medical expense deductions:
Section 213(a) of the Code allows a deduction in computing taxable income for expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, the taxpayer's spouse, or a dependent (as defined in section 152) to the extent that the expenses exceed 7.5 percent [now 10 percent] of the taxpayer's adjusted gross income.
Section 213(d)(1) of the Code defines the term “medical care” to include 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.
Section 1.213-1(e)(1)(ii) of the regulations provides, in part, that deductions for expenditures for medical care allowable under section 213 of the Code will be confined strictly to expenses incurred primarily for the prevention or alleviation of a physical or mental defect or illness. An expenditure that is merely beneficial to the general health of an individual is not an expenditure for medical care.
As with the definition of “handicapped” above the language “prevention or alleviation of a physical or mental defect or illness” also predates more appropriate and sensitive terminology. It should not be that the fact that home improvements will not “prevent” or “alleviate” a “defect” should not limit deductibility. Clearly the use of handrails and grab bars, which the Service permits (see below) does not prevent or alleviate any “defect” but merely might aid mobility or even just prevent a fall and injury. Those improvements are seemingly contemplated in the Ruling.
This provision of the Ruling sets forth some of the more important limitations taxpayers will have to grapple with. However, upon a review of the cited case, the holding of the Ruling is very favorable to taxpayers.
Ferris Case Analysis
In making a capital expenditure that would otherwise qualify as being for medical care, any additional expenditure that is attributable to personal motivation does not have medical care as its primary purpose and is not related directly to medical care for purposes of section 213 of the Code. Such personal motivations include, for instance, architectural or aesthetic compatibility with the related property. Consequently, such additional expenditures are not deductible under section 213. Ferris v. Commissioner, 582 F.2d 1112 (7th Cir. 1978), rev'g and rem'g T.C.M. 1977-186. In Ferris, the taxpayer had incurred additional costs for architectural and aesthetic reasons in building an enclosed pool that otherwise qualified as an expenditure for medical care. A deduction for the additional costs was denied.
The above limitation is an important one to factor into the analysis of what a client might deduct, but unfortunately the guidelines are not as informative as might be desired. For example, it seems clearly contemplated that the costs of installing grab bars would qualify. However, to properly install grab bars the wall surfaces have to be removed so that bracing (e.g., plywood or 2x4s) can be installed between the studs of the wall. Grab bars are quite important, and commonly installed, in bathrooms. This would require the removal of the sheetrock which in turn would first require the removal of the tile. It will be rarely if ever possible to replace existing tiles due to unavailability of older tiles, or even change in dye lots for recently purchased tile. Thus, the practical solution in most instances, and frankly one of the impediments to many needing such improvements, is the cost of removing and retiling an entire bathroom. Arguably, under the literal language of the Ruling replacing tile in the area of the bracing would be deductible but the remainder of the tile might be viewed as being done for “architectural or aesthetic compatibility with the related property.” However, this interpretation would emasculate the tax benefits of this provision. Further, it might be impossible when quoted a fee for a bathroom renovation to differentiate the respective costs. Finally, if a client is installing grab bars and the appropriate bracing, the same client might also be replacing regular bathroom tile floors with slip-resistant tiles at the same time. Thus, a rather significant portion of the retiling would appear to qualify for the deduction. At this point is it reasonable or practical to identify a portion of the cost that is only for “architectural or aesthetic compatibility with the related property?”
The Ferris Court found that non-essential items included space occupied by the steps at the deep end of the pool and approximately six feet of the width of the elevated sitting area. However, the Court found that a host of expenditures disallowed by the Service were in fact permissible. These included: “…the costs relating to the spiral staircase and the conversion of the screen porch which were necessary to minimize the distance petitioner had to walk to reach the pool, the sliding glass doors which were necessary to ventilate the pool area during the summer, the entrance steps at the shallow end of the pool, and certain intricacies of indoor pool construction such as water temperature, dew points and vapor barriers.”
In addition to this favorable allocation the Ferris court went much further. In the Ferris case the Court stated: “However, we are aware of no case limiting a medical expense within the meaning of section 213 to the cheapest form of treatment. For instance, if a taxpayer desires to stay in a private hospital room as opposed to a ward, or to patronize the most expensive medical institutions, the full amount of the expenditure qualifies as a medical expense. The ability to receive a tax benefit for any personal element of a capital expenditure having for its primary purpose the medical care of the taxpayer is substantially curtailed by section 1.213-1 (e)(1)(iii), Income Tax Regs., which limits the amount which may qualify as a medical expense to the difference between the total expenditure and the amount which the improvement enhances the value of related property. As a result of the limitation imposed by the regulations, approximately the same result is reached as under respondent's method of limiting the costs taken into consideration to those of a "bare bones" structure.” Thus, it is the fair market value limitation which is the primary restriction, not the taxpayer using more costly and better quality materials or designs.
Jacobs Case
In Jacobs v. Commissioner, 62 T.C. 813 (1974), the Tax Court held that for an expense to be deductible under section 213 of the Code it both must be an essential element of treatment and must not have otherwise been incurred for nonmedical reasons. An expenditure failing either test would be a nondeductible personal, living, or family expense under section 262. See Rev. Rul. 76-80, 1976-1 C.B. 71.
The “essential element of treatment” test seems incongruous with the intent of the statute. Grab bars, an entry ramp and many other common improvements to make a residence accessible, or safe, for a client with a disability, have nothing to do with the “treatment” of the disease. Yet these expenditures appear to be uniformly acknowledged as deductible. If the actual facts of the Jacobs case are reviewed, the impact of the decision on deducting home improvement medical expenses is negligible if not irrelevant. In Jacobs the taxpayer’s psychiatrist recommended that he divorce. The taxpayer did so and endeavored to deduct his legal fees in the divorce as a medical expense. To no surprise, the Court found them to be a non-deductible personal expense and not a medical expense.
Deductable as Medical Expenses
In S. Rep. No. 99-313, 99th Cong., 2d Sess. 59 (1986), 1986-3 (Vol. 3) C.B. 59, and 2 H.R. Rep. No. 99-841 (Conf. Rep.), 99th Cong., 2d Sess. II-22 (1986), 1986-3 (Vol. 4) C.B. 22, Congress expressed a desire to clarify that certain capital expenditures generally do not increase the value of a personal residence and thus generally are deductible in full as medical expenses. These expenditures are those made for removing structural barriers in a personal residence for the purpose of accommodating it to the handicapped condition of the taxpayer or the taxpayer's spouse or dependents who reside there.
The Internal Revenue Service has determined that expenditures for the following purposes generally do not increase the fair market value 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:
1. Constructing entrance or exit ramps to the residence
- This should include replacing a marble lintel at a door with new lintel with a Hollywood cut that makes it easier for a wheel chair to access the residence, and which reduces a tripping hazard.
2. Widening doorways at entrances or exits to the residence
3. Widening or otherwise modifying hallways and interior doorways
4. Installing railing, support bars, or other modifications to bathrooms
- See discussion above concerning tile and other modifications necessary to properly installing the supports for the grab bars, especially in light of the Ferris decision which is reviewed in detail above.
5. Lowering of or making other modifications to kitchen cabinets and equipment
6. Altering the location of or otherwise modifying electrical outlets and fixtures
- Similarly, lowering light switches should all be included
7. Installing porch lifts and other forms of lifts (Generally, this does not include elevators, as they may add to the fair market value of the residence and any deduction would have to be decreased to that extent. modifying fire alarms, smoke detectors, and other warning systems
8. Modifying stairs
9. Adding handrails or grab bars whether or not in bathrooms
10. Modifying hardware on doors
- A common application of this is replacing regular handles with lever handles.
11. Modifying areas in front of entrance and exit doorways
12. Grading of ground to provide access to the residence.
The Ruling continues on to state:
The above list of expenditures is not exhaustive. 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. Moreover, 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 section 213 of the Code. Additional costs attributable to personal motivations are not deductible under section 213.
Subject to the percentage limitation of section 213(a) of the Code, the above capital expenditures incurred to accommodate a residence to the handicapped condition of the taxpayer, the taxpayer's spouse, or one of the taxpayer's dependents generally are deductible in full under section 213 provided that the residence is the personal residence of the handicapped individual.
Additional Considerations
Amounts you pay for operation and upkeep of a capital asset qualify as medical expenses, as long as the main reason for them is medical care. This rule applies even if none or only part of the original cost of the capital asset qualified as a medical care expense.
Oliver Case Discussion and Analysis
In W. Lawrence Oliver and Hazel P. Oliver v. Commissioner, the Court did not object to a wide range of costs but rather to the fact that the taxpayer himself made the determinations as to the value which the improvements added to the value of the home. The taxpayer clearly had a vested interest in the outcome and was a practicing attorney, not a real estate professional. Further, it appears that the taxpayer provided inadequate corroboration of the costs incurred. The case is in part instructive in how not to handle a claimed deduction for medical improvements to a home. The indication of the types of expenses may also prove of interest to practitioners.
In the Oliver case 7 Mrs. Oliver has been under treatment for multiple sclerosis, the taxpayers built a new home which contained many special features designed to make things easier for Mrs. Oliver and to aid in her care. Among other things, the house had wide doorways to accommodate a wheelchair, air conditioning, a communication system and a built-in stereo system. A motor-driven hospital bed was installed. At the trial Mr. Oliver, claiming to have had experience as a real estate appraiser, stated the cost of special ramps and doors without increasing the value of the house. Similarly, he claimed that the air conditioning system cost $1,200 and added only $600 to the fair value of the house. The intercom system cost $800 and added only $500 to the fair value of the house. The stereo system cost $5,000 and added $2,000 to the value of the house. He also asked that the entire $600 cost of the special bed be deducted. The Tax Court held $900 of the cost of the special features in the house and $500 of the cost of the bed were proper deductions but denied the remaining claimed balances.
Home improvements, which aid in medical care as defined in Section 213 of the Internal Revenue Code, are proper medical deductions to the extent that they do not increase the value of property. The problem in the Court’s view was that Mr. Oliver, except for his testimony, made no proof of the costs of the special features of the home built, nor of the extent to which any such costs did not increase the value of the home. While he said he had experience as an appraiser of real estate, there was no corroboration of that claim. The Court held that some part of the costs of the special features of the home were allowable as medical expenses. Exercising its judgment, the Court found that $900 of the cost of the special features of the home and $500 for the special bed were allowable as deductions for medical expenses in 1960. The Court was clearly troubled by Mr. Oliver’s lack of professional qualifications and found his testimony “improbable, unreasonable, or questionable”. The Court also noted that Mr. Oliver had a direct interest in the outcome of the proceedings. Because of his self-interest, the Tax Court, as the arbitrator of credibility, may disregard his testimony or, as here, reduce his valuations.
Lipson Case Discussion and Analysis
The Marvin Lipson and Rose C. Lipson v. Commissioner case presents another example of what not to do when endeavoring to claim a medical expense for home improvements. Most significant, the taxpayer provided little substantiation that his claimed allergies to dust and cats justified the improvements, and there was inadequate medical corroboration for the conditions and improvements. 8 The primary cost incurred as a forced air system to deal with the taxpayer’s asthma.
The “medical” letter provided by the taxpayer was as follows:
To whom it may concern
This will certify that I have advised Marvin Lipson to have air conditioning with filters installed in his home for medical reasons.
/s/ Walter L. Palmer
The second statement typed on the doctor's letterhead stationary reads as follows:
February 13, 1984
MEMORANDUM
This memorandum is being written at the request of Mrs. Rose Lipson who has been a patient of mine since January 1971. During this period of thirteen years, I have had considerable contact also with her husband, Marvin Lipson, and have on occasion written prescriptions for him as well as for her.
* * *
I also recommended the use of Alupent inhalant and the installation in his home of an air conditioning system with air filters as per my handwritten note of May 4, 1978.
/s/ Walter Palmer, M.D.
Very Truly Yours,
The Court, unsurprisingly, did not find these documents convincing.
Conclusion
As clients age and the incidence of chronic disease and disabilities increase practitioners should give more attention to the potential for a tax deduction for home improvements made to adapt a home to meet the client’s medical needs. As the preceding analysis demonstrates a wide range of expenses may qualify, but care has to be exercised in corroborating the medical need and that the expenses are not deducted to the extent they increase the value of the home.
1 http://www.aoa.gov/AoARoot/Aging_Statistics/future_growth/aging21/health.aspx. August 5, 2014.
2 Rogers, S., & H. Komisar. Who needs long-term care? Fact Sheet, Long-Term Care Financing Project. Washington, DC: Georgetown University Press, 2003, cited at https://www.caregiver.org/selected-long-term-care-statistics. August 5, 2014.
3 AARP. Beyond 50.2003: A Report to the Nation on Independent Living and Disability, 2003, http://www.aarp.org/research/health/disabilities/aresearch-import-753.html (11 Jan 2005), cited at https://www.caregiver.org/selected-long-term-care-statistics. August 5, 2014.
4 Ferris v. Commissioner, 582 F.2d 1112 (7th Cir. 1978), rev'g and rem'g T.C.M. 1977-186.
5 “Web MD contained an article “Adapting Your Home for Parkinson's Disease,” Aug. 5, 2014 at http://www.webmd.com/parkinsons-disease/guide/parkinsons-home-safety.
6 http://dictionary.reference.com/browse/handicapped. August 5, 2014.
7 W. Lawrence Oliver and Hazel P. Oliver v. Commissioner 283 U. S. 223, 227-229, 51 S. Ct. 413, 75 L. Ed. 991 (Aug. 2, 1966).
8 Marvin Lipson and Rose C. Lipson v. Commissioner, T.C. Memo. 42,295(M), 50 T.C.M. 692, T.C. Memo. 1985-409, (Aug. 12, 1985)
Martin M. Shenkman, CPA, MBA, PFS, AEP, JD is a regular tax expert source in The Wall Street Journal, Fortune, Money and The New York Times.
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