Continuation from Part 1 Posted on July 9, 2013.

Medical travel and transportation:

•  For 2013 tax returns: 24 cents per mile.
•  For 2012 tax returns: 23 cents per mile.
•  Lodging costs (but not meals) up to $50 per day are deductible for the taxpayer and one additional  person if an overnight stay is necessary.

Capital Expenditures

As a general rule, capital expenditures are not permitted as a medical expense deduction. However, a medical expense deduction is available when the capital expenditure is made primarily for the medical care of the taxpayer, the taxpayer’s spouse, and/or the taxpayer’s dependents. To secure a current medical expense deduction for a capital expenditure, the cost must be reasonable in amount and incurred out of medical necessity for primary use by the individual requiring medical care. These deductions fall into two categories:

(1) expenditures improving the taxpayer’s residence while also providing medical care (e.g., a central air conditioning system for an individual suffering from a chronic respiratory illness). These expenses are deductible only to the extent that the cost exceeds the increase in the property’s fair market value as a result of the capital expenditure. For example, after a physician recommends installing an elevator for an individual suffering from a chronic and disabling arthritic condition limiting the individual’s mobility, an elevator costing $20,000 is installed in the taxpayer’s home. As a result of the expenditure, the home increases in value by $5,000. Therefore, $15,000 may be deducted as a medical expense. Expenditures incurred in the second category are fully deductible under the presumption that there is no increase in the property’s value as a result of removing a physical barrier.

(2) expenditures removing structural barriers in the home of an individual with physical limitations (e.g., construction costs incurred for an entrance ramp, widening doorways and halls, customizing bathing facilities, lowering kitchen cabinets, and adding railings).

Under either category, costs incurred to operate or maintain the capital expenditure (such as increased utility and maintenance costs to operate the elevator) are deductible currently as medical expenses as long as the medical reason for the expenditures continues to exist.

Conferences and Seminars

Parents and guardians of special needs children often attend medical conferences and seminars to learn more about their child’s disability. Under Rev. Rul. 2000-24, amounts paid for the registration fees and travel expenses are deductible as medical expenses if the costs are primarily for and essential to the dependent’s medical care. Parents should obtain a recommendation from their child’s doctor to ensure the medical deduction is not disallowed. The conference or seminar must deal specifically with the medical condition the child has, not just general health and well-being issues. Moreover, the ruling does NOT permit deductions for meals and/or lodging costs incurred while attending the conference. Both transportation and admission fees to qualifying medical conferences or seminars are deductible; however, lodging and meals are not (Rev. Rul. 2000-24).

Impairment-related work expenditures

As special needs individuals mature and enter the workplace, many are entitled to claim itemized deductions for their unreimbursed impairment-related work expenses under Sec. 67(d). Impairment-related work expenses refer to expenses that a handicapped individual incurs for attendant care services at the place of employment enabling the individual to maintain employment, and that qualify as trade or business expenses. Handicapped individuals for this purpose are defined as those having a physical or mental disability (including but not limited to blindness or deafness) that is a functional limitation to employment or a physical or mental impairment (including but not limited to impaired sight or hearing) that substantially limits one or more major life activities, such as performing manual tasks, walking, speaking, breathing, learning, or working.

According to the IRS instructions in Publication 502, Medical and Dental Expenses, an employee should include impairment-related work expenses on his or her form 2106, Employee Business Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses. These expenditures are then transferred to Form 1040’s Schedule A, Itemized Deductions, as an unreimbursed business expenses that are not subject to the 2% of AGI limitation on miscellaneous itemized deductions (Publication 529, Miscellaneous Deductions).

Taxpayers participating in tax-advantaged plans through work for funding medical expenses, such as a flexible spending account (FSA) or health savings account (HSA), can set aside limited amounts of money to finance medical care expenses on a pretax basis, thereby avoiding the 10%-of-AGI limitation. The definition of medical care expenses for this purpose is the same as it is for the medical expense deduction. Amounts that can be set aside pretax under an HSA in 2013 are $3,250 for employees with single coverage and $6,450 for employees with family coverage. The maximum pretax contribution to a health FSA for all taxpayers is $2,500 beginning in 2013.

Earned income tax credit

The idea behind the Sec. 32 earned income tax credit (EITC) is to encourage the economically disadvantaged to work by partially offsetting the social security taxes on wages. Appropriately, the EITC is not available to taxpayers who have unearned income (i.e., dividends, interest, gains on sales of securities) above a specified threshold ($3,300 for 2013). Families with AGI in 2013 under $51,567 who file a married joint return and have three qualifying children (with two qualifying children, AGI under $48,378, and with one qualifying child, AGI under $43,210) may qualify for the EITC, which is a refundable credit.

For EITC purposes, a “qualifying child” has the same definition as for the dependency exemption—an individual who has the requisite relationship with the taxpayer, who resided with the taxpayer for more than six months during the calendar year, and who is under age 19 at the end of the year, under the age 24 and a full-time student, or is permanently and totally disabled (Sec. 32(c)(3)). Thus, as noted previously, a severely disabled child is a “qualifying child” regardless of age, even into adulthood, as long as the child continues to live with his or her parent(s) or another person who meets the relationship test with respect to the child. The maximum EITC for 2013 is $6,044 for families with three or more qualifying children; $5,372 for families with two qualifying children; and $3,250 for families with one qualifying child.

By Thomas M. Brinker Jr. and W. Richard Sherman

Edited and posted by Harold Goedde CPA, CMA, Ph.D. (taxation and accounting)