NEW YORK (CNNfn) - Giving up smoking now greatly increases your chance of a tax rebate.|
So can getting laser surgery to fix shortsightedness. Or installing an elevator in your home.
All three qualify as medical expenses with the Internal Revenue Service, assuming you get a doctor's prescription. If your medical expenses amount to more than 7.5 percent of your adjusted gross income, you can claim expenses above and beyond the 7.5 percent on your tax return.
Sizable medical expenses can make a sizable difference. The latest figures available from the IRS, for 1997, show that 5.3 million people claimed a total of 29.3 billion in medical expenses. That makes the average claim just over $5,525. At a 28 percent federal tax rate, that's a $1,548 check, far from chump change.
An unusual deduction
The medical-costs tax deduction is an unusual one that's not always well understood, tax experts say. Some unusual expenses count toward the limit, and there's some strategy to how you approach the deduction.
One of the most interesting aspects, for instance, is that you can claim capital improvements, said Laurence Foster, a partner in accounting company KPMG's personal-finance practice. If you can prove the capital expense was medically necessary, you can claim it.
But you can only claim it if the capital improvement did not increase the property value of your home. If it did, you can claim to the degree that the cost exceeds the increase in property value. For example, if an improvement cost $100,000 and raised your home value $50,000, you can claim the $50,000 difference on your taxes.
So if you have an asthma or allergy problem, you might be able to claim installing an air-conditioning system, for instance, if your doctor deems one necessary. Foster even had a client who claimed for installing a swimming pool in her home to help with a respiratory problem. She can't go to a public pool because she is allergic to the chemicals in them.
"There may be a reason to have a gym installed in your home," Foster continued, or ramps or an elevator for a wheelchair-bound person. But make sure that you get a note from your physician and that you keep your receipts. "It covers capital improvements as prescribed by a doctor that don't increase the value of your home," Foster said.
Filing is rare but getting a little easier
Those are unusual situations. It's more likely you'll run up on the 7.5 percent limit through having a baby or having expensive dental work done. The costs must have come out of your pocket and can't have been paid back to you by your health insurer. If you claim a medical-cost deduction in one year that your insurer repays to you next year, you have to declare the reimbursement as income.
That's why the medical-expense deduction is a relatively rare one. Just 4.3 percent of the tax-filing population -- and there were 122.4 million individual returns in 1997 -- claimed it.
"They would have to be fairly substantial nonreimbursed expenses," Martin Nissenbaum, national director of personal income tax planning for Ernst & Young, pointed out.
But changes in the tax law have made it slightly easier to qualify for 1999. Smoking-cessation courses and products are now covered if a doctor prescribes them. Over-the-counter purchases of the patch or nicotine gum wouldn't count.
Laser surgery to fix your eyesight is another new deduction. Even though the surgery is optional, it's now deemed a genuine medical expense because it restores a function of the eye. Cosmetic surgery such as a nose job or tummy tuck wouldn't be covered, unless you can somehow justify the surgery on medical grounds.
There's a little wiggle room here and there. For instance, if you're having your sinuses fixed, having the doctor straighten out your nose to stop the problem from reoccurring "would probably be OK," Nissenbaum said.
If your teeth are not normal, "fixing them to make them look normal is fine," he said. But a purely cosmetic procedure like having your teeth whitened wouldn't qualify.
"Bunch" your costs where you can
For the most part, there's little planning possible with the deduction because most medical expenses are unexpected. But tax pros recommend trying to "bunch" your expenses in one tax year if you're near the 7.5 percent limit. That increases to 10 percent for people subject to the alternative minimum tax.
If you are in really good shape, meaning you're unlikely to need much medical help in future years, and you're getting laser surgery and thinking about getting a vasectomy, "go ahead and do both in the same year," Nissenbaum said.
Similarly, if you are pushing the 7.5 percent threshold and you are considering optional dental work, such as caps and crowns, and your dependent kids need orthodontic work and braces, bunch those costs in the same year if you can afford to, Nissenbaum added.
Travel, kids and home health care can count
When claiming, you can include travel costs involved in getting medical care, including hotel stays but not meals. The logic? You would have had to eat anyway, Foster said. If you haven't recorded your driving expenses, you can claim 10 cents a mile, as well as for any parking and toll costs. "If you haven't tracked it, it's easier to take the 10 cents a mile," Foster said.
If you have a dependent child or elderly relative, you can claim medical expenses you've paid on their behalf, including special schooling or psychiatric care. Nursing-home costs are covered if the primary function of the home is to provide medical care. Rents at "country-club" style retirement enclaves wouldn't be covered.
Hiring home help is a deductible expense to the extent that the person provides medical care. In other words, hiring a nurse would likely be fully deductible, but you'd have to break out how much time a housekeeper spent doing household chores vs. how much time they spent providing medical help. You can deduct only the medical portion of their pay.
A cafeteria plan may make more sense
If you're married, it's worth mulling over how best to file, Foster said. Say a couple has a joint income of $100,000, with the wife earning $70,000 and the husband $30,000. The husband has medical expenses of $5,000.
File together, and they won't be eligible to deduct anything because they haven't reached the 7.5 percent threshold, $7,500 in their case. But if the husband files as a married person filing separately, he could claim the expenses above and beyond his 7.5 percent income threshold of $2,250. With bills of $5,000, he could deduct $2,750 from his taxes.
If you're self-employed, you can claim up to 60 percent of your medical-insurance premiums regardless of whether you're over the 7.5 percent threshold or not. If you reach the 7.5 percent gross income limit, the balance counts as a deductible medical expense.
Since most people don't hit the 7.5 percent limit, it's normally a better idea to pay into a "cafeteria" plan with a flexible spending account, if your employer offers one, Nissenbaum said. Each year, you set the amount of money you want to contribute to the plan. Your employer deducts regular payments from your paycheck, pre-tax.
The money is then set aside for medical expenses and you claim against it as you go. You're eligible to claim the full amount of your election from the start of the year. That means your employer can in fact be left on the hook if you claim in full, then leave before the year is up.
Flexible-spending plans are "use it or lose it" plans. They work best for set medical expenses that you can anticipate paying every year, such as birth-control pills and dental cleanings. But if you haven't spent your limit and the end of the year is approaching, it's worth going out and getting those new glasses or elective medical or dental care, to make sure you max out the amount.