Issue:

Medical Expense Deduction of a Capital Expenditure

Facts:

Pat is afflicted with the pain of arthritis. At her physician's advisement, she installed a hot tub on her property at an initial expense of $5,000.00 and an annual operational expense of $750.00.

Law & Authority:

IRC §213(a) allows a deduction for unreimbursed expenses paid during the tax year for medical care of the taxpayer (and taxpayer's spouse and dependents as defined in §152) greater than 7.5% of the Adjusted Gross Income for that tax year.

IRC §213(d)(1) defines "medical care" to include the 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.

§1.213-1(e)(1)(iii) of the Treasury Regulations states, in part:

"Capital expenditures are generally not deductible for Federal income tax purposes. However, an expenditure which otherwise qualifies as a medical expense under §213 shall not be disqualified merely because it is a capital expenditure. For purposes of §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 of the taxpayer, his spouse, or his dependent....Moreover, a capital expenditure for permanent improvement or betterment of property which would not ordinarily be for the purpose of medical care 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..."

The Tax Court has also held that for an expense to be deductible under §213 of the Code it both must be essential for treatment and must not have otherwise been incurred for nonmedical reasons. Also see Rev. Rul. 76-80, 1976-1 C.B. 71. (Jacobs v. Commissioner, 62 T.C. 813, 1974).

In respect to the operational expenses incurred during the tax year for the care and maintenance of the capital equipment, Rev. Rul. 55-261, 1955-1 CB 307, et. al., concludes that "the expense of operating equipment necessary thereto...were expenses incurred primarily for the alleviation of a physical illness and may be deducted.

Conclusion:

Pat may be eligible for a medical deduction with respect to the capital expenditure. This will be based on the Fair Market Value (FMV) of her property before and after the installation of the hot tub. If the FMV increased by $5,000.00, then there is no deduction, but if the increase is less than $5,000.00, than the difference would represent the deductible medical expense associated with the capital expenditure.Therefore, if the house was worth $200,000 prior to the installation of the hot tub, and the market value increased to $202,500., after the addition of the hot tub, Pat's medical expense for tax purposes would be $2,500.

The operational expenses incurred during the year are fully deductible.

All medical expenses will be subject to the 7.5% Adjusted Gross Income limitation, as outlined on Schedule A/Form 1040.

References:

IRC §213(a)

IRC §213(d)(1)

Reg. §1.213-1(e)(1)(iii)

Letter Ruling 8112069, Dec 29, 1980

Rev. Rul. 87-106, 1987-2 CB 67, (Jan 1, 1987), IRB 1987-43, 13

Rev. Rul. 55-261, 1955-1 CB 307, as modified by Rev. Rul. 58-8, 1958-1 CB 154, Rev. Rul. 58-280, 1958-1 CB 157, Rev. Rul. 63-91, 1963-1 CB 54 and Rev. Rul. 68-212, 1968-1 CB 91.

Ferris v. Commissioner, 582 F. 2d 1112 (7th Cir. 1978)

Jacobs v. Commissioner, 62 T.C. 813 (1974) S. Keen, 42 TCM 170, Dec 37,999(M), TC Memo 1981-313 CCH-EXP, 93 FED 12,543