Memorandum MARCH 28, 1974

Topic Code: I345Itemized Deductions          Document Reference:

MEMORANDUM MARCH 28, 1974

Medical Expense Reimbursements - Deductions Claimed Prior Year

Medical expenses are taken into account for deduction purposes only to the extent that the expenses are not compensated for by insurance or otherwise. It sometimes happens that a taxpayer pays medical expenses in one year and receives reimbursement in a later year. Under these circumstances, the Code provides that the reimbursements are to be included in income to the extent that they are "attributable to (and not in excess of) deductions allowed... for any prior taxable year".

In considering the treatment of such insurance proceeds received, it is first necessary to determine for what the proceeds were paid. If they reimburse the taxpayer for medical care expenses that were deducted, they must be included in income to the extent required by the rule shown above. If the proceeds are to compensate the taxpayer for loss of income, they are excludable in full if the taxpayer paid the premiums on the policy. If the employer paid the premiums, the loss of income proceeds are excludable only to the extent that they qualify under the sick-pay exclusion rules. In situations where both employer and employee contributed to the cost of the loss of income coverage, the proceeds must be allocated on the basis of lost to each.

If the proceeds indemnify the taxpayer for loss of a body member or function of his body or for disfigurement or are otherwise based on the nature of the injury, rather than on time missed from work, they are fully excludable regardless of who paid for the insurance.

Auto Insurance Not Partly Medical Cost

If part of an automobile insurance policy is for the medical care of persons, in addition to the taxpayer, his spouse or his dependents, injured in or by the taxpayer's automobile, no part of the premium is deductible as a medical expense, unless an allocation of the medical coverage is made. So says a new IRS ruling.

Under the law, if an insurance policy covers medical care and other items, amounts paid for medical care are deductible medical expenses if they are reasonable in relation to the total charges under the policy and are separately stated in the policy.

Here, the portion allocable to medical insurance was reasonable and was separately stated. However, coverage was not limited to the taxpayer, his spouse and his dependents, and the portion allocable to them was not separately stated. (FTGR November 16, 1973)

Medical Care Only

Assuming that the proceeds are paid solely to reimburse the taxpayer for medical care expenses, they are includible in income in full if they do not exceed the deduction allowed for those expenses in an earlier year. If they exceed the deduction, but do not exceed the medical expenses paid (as will often be the case because of the 1% and 3% limitations), the proceeds are includible up to the amount of deduction taken. However, if the taxpayer claimed the standard deduction, no portion is included in income. (FTGR January 25, 1974)

Marriage Counseling Fee Not Deductible

Fees paid by a husband and wife for marriage counseling by a clergyman associated with a counseling center are not deductible expenses according to a new IRS ruling. The counseling was not for the prevention or alleviation of a physical or mental defect, but was for the purpose of improving a marital relationship.

It might be noted in this connection, that the IRS recently ruled that a couple could deduct, as a medical expense, the amount paid for pyschiatric treatment by physicians for sexual inadequacy and incompatibility. (FTGR 8-8- 75)

Marital Counseling Fees

A recent trend in marriage has been for couples to seek psychiatric treatment for sexual inadequacy and incompatibility. The IRS has recently ruled that such psychiatric treatment is deductible as a medical expense. However, the expenses of meals and lodging at a hotel in which the couple would stay while undergoing treatment for sexual incompatibility and inadequacy is not deductible. (FTGR 5-30-75)

Deduction Of Medically Prescribed Food

According to the I.R.S., if special foods and beverages prescribed by a physician for prevention or alleviation of a particular disease are merely substitutes for items normally consumed, no medical deduction is allowed. On the other hand, if the special foods and beverages are in addition to the normal diet, the cost is deductible as a medical expense.

Even though a taxpayer, such as a diabetic, may have a prescribed diet or have food specially prepared, he may not deduct the entire cost of the diet. It is common knowledge that dietetic foods are usually more expensive than their non-dietetic counterparts.

A recent ruling in a Tax Court case allowed a taxpayer to deduct as a medical expense the additional charge made by restaurants for the preparation of salt-free meals. Using the same line of reasoning, it would appear that the excess of the cost of dietetic groceries over the cost of comparable non- dietetic groceries would be deductible. From the ruling it appears that there is judicial support for taxpayers on special diets who take the trouble to record the additional costs of special foods and beverages to be able to claim these additional costs as a medical deduction. The special diet must be prescribed. (FTGR 10-13-74)

Medical Expenses: Braille Book And Magazines

A taxpayer purchasing braille books and magazines for his blind child may deduct, as expenses for medical care under section 213 of the Internal Revenue Code, that portion of the purchase price that exceeds the price for regular printed editions.

Section 1.213-l(e)(l)(ii) of the Federal Income Tax Regulations provides, in part, that deductions for expenditures for medical care will be confined strictly to expenses incurred primarily for the prevention or alleviation of a physical or mental defect or illness.

Where an item purchased in a special form primarily for the alleviation of a physical defect (in this case braille editions of books and magazine purchased for the blind), is one that is ordinarily used for personal, living, and family purposes, the excess of the cost of the special form over the normal cost of the item is an expense for medical care. (Internal Revenue Bulletin, August 4, 1975)

Cost Of Vacuum Not A Medical Expense

Under a new IRS ruling, no part of the cost of a vacuum cleaner purchased by an individual who has an allergy to household dust is deductible as a medical expense. It makes no difference that a doctor recommends the use of an air cleaner, which is one of the features of the vacuum cleaner. (FTGR 3- 12-76)

Medical Expense Deduction For Cost Of Getting Divorce

As a result of a Supreme Court decision, it may no longer be possible to allocate certain medical expenses as partly deductible and partly non- deductible. If the expense would have been incurred whether or not the taxpayer was ill, no part of the expense is deductible.

This is the implication of a recent Tax Court decision that denied a medical expense deduction for costs the taxpayer incurred in divorcing his wife after his psychiatrist informed him that the divorce was necessary for his mental well-being. The court felt that he would have sought the divorce even if he had been well. A citation used in this decision held that an airline pilot who would have driven to work in any event could not deduct that portion of his automobile expenses that was attributable to transporting his flight equipment to work. (FTGR 10-18-74)

Automobile Telephone Not A Medical ExpenseNewsletter #31 8-30-75

A man who had a heart attack in the past and was physically handicapped had a telephone installed in his automobile. He claimed a medical deduction on the basis that the primary purposes was to enable the man to call his doctor in case of another attack.

The Tax Court, however, found that the telephone served personal purposes, too and denied the medical expense deduction (FTGR 8-8-75)

Part Of Cruise Expense Is A Medical DeductionNewsletter #36 April 29, 1976

Of the total expenses incurred by a patient in taking a cruise that was recommended by his physician, only the amount attributable to reviewing the individual's medical records, performing medical tests, and reporting the results to his physician were deductible medical expenses, according to a new IRS ruling.

The cruise was not of the usual type. A group of physicians went along and provided clinical medical services, dietary supervision, and seminars relative to the patient's medical condition.

The cruise was not primarily for and essential to the individual's medical care. Accordingly, the transportation expense of the cruise cost is not a deductible medical expense under Section 213 of the Code. Moreover, the food and lodging expense of the cruise cost is not a deductible medical expense because the ship is not a hospital or other medical institution. Inasmuch as the instructive seminars relative to the patient's medical condition and the supervision of the patient's dietary program are for the preservation of general health, the part of the cruise cost attributable to those items is not a deductible medical expense. (FTGR 3-26-76)

Capital Asset-Medical Deduction

It has recently been ruled that the cost of operating and maintaining a capital asset (e.g. air conditioning) can be deductible as a medical expense if the expenditure has as its primary purpose the medical care of the taxpayer, his spouse, or his dependent.

The entire amount of the expense may be deducted whether or not any part of the cost of the asset is deductible. (FTGR July 2, 1974)

Section 213 Medical, Dental, Etc., Expenses

Advice has been requested whether amounts paid by taxpayers for insurance for their contact lenses are amounts paid for medical care as defined in Section 213 (e) of the Internal Revenue Code of 1954.

Amounts paid by a taxpayer for contact lenses to correct his vision are payment for medical care within the code. Accordingly, the amounts paid by taxpayers for insurance against loss or damage to their contact lenses are amounts paid for medical care within the meaning of the code and, therefore, are legal deductions. (WRD 10-9-74)

Cost of Operating Capital Asset May Be Medical Expense

An amendment has been proposed to the regulation that states that if a capital expenditure is primarily for the medical care of a taxpayer, his spouse or his dependent, it is deductible as a medical expense and that if the expenditure results in the improvement or betterment of the taxpayer's property, the deduction is limited to the amount by which expenditure exceeds the increase in the value of the property. Under present regulations, if a taxpayer installs a home elevator for medical reasons, he may deduct only $300 of a $1,000 installation cost, if the installation increases the value of the residence by $700. If the value of the residence is increased by $1,000 or more, no deduction is allowable.

Proposed Amendment

The proposed amendment makes it clear that the costs of operating and maintaining the capital asset may be fully deductible as medical expenses (subject, of course, to the 3 percent limitation) even though the original cost of the asset was nondeductible in full or in part. Thus, the elevator installer could deduct such costs no matter how much the installation increased the value of his residence. (FTGR. November 16, 1973)

Medical Expenses; Payment For Future Lifetime CareNewsletter #30 7-30-1975

A taxpayer who paid a lump-sum life-care fee to a retirement home, which demonstrated that a certain portion of the payment for lifetime care is allocable to the retirement home obligation to provide medical care to the taxpayer, may deduct the allocable portion as expense for medical care in the year paid.

In the event a taxpayer terminates his membership he would, under certain circumstances, be entitled to a refund of a portion of the life-care fee paid. Thus, any refund of the life-care fee that may be received by the taxpayer in a later year must be included in gross income for such later year to the extent attributable to deductions allowed under section 213 of the code for any prior taxable year. (Internal Revenue Bulletin, July 28, 1975)

Future Medical Expenses - Personal Injury Settlement

A taxpayer received a settlement of a damage suit for personal injuries sustained in an automobile accident. A specific amount of the settlement was attributable to future medical expenses related to the injuries suffered.

The amount received in the settlement which was attributed to future medical expenses was excludable from the taxpayer's gross income. However, no deduction will be allowed to the taxpayer for any medical expenses paid on account of the injuries suffered until the entire amount attributed to future medical expenses is expended. (Internal Revenue Ruling 75-232)

Medical Expenses Recovered In Personal Injury Settlement

A taxpayer received a settlement in a damage suit for personal injuries. In previous tax years, the taxpayer had paid and deducted medical expenses incurred for treatment of the personal injuries.

The settlement included no allocation of the amount received between the taxpayer's previously paid medical expenses and his pain and suffering.

Since there was no allocation in this case, it will be presumed that the medical expenses incurred and deducted in the prior years will be recovered first out of the settlement proceeds. The amount recovered in the settlement for medical expenses will be included in the taxpayer's gross income in the year of recovery to the extent the deductions for medical expenses were allowed in the previous tax years.

In cases where the settlement of a personal injury suit contains an express allocation of the amount received in settlement to previously paid medical expenses deducted by the taxpayer, the allocation will be presumed to be correct unless it is unreasonable according to the facts. The amount allocated to medical expenses will be included in the gross income in the year of receipt to the extent the expenses were deducted in a prior tax year. (Internal Revenue Ruling 75-230)

Medical Expense Reimbursements Newsletter #34 January 31, 1976

Medical expenses are deductible only to the extent they are not reimbursed. But, how are reimbursements treated when they are received in a year after the expenses have been deducted?

The Code provides that the reimbursements are to be included in income to the extent they are "attributable to (and not in excess of) deductions allowed....for any prior taxable year".

There are some additional considerations, however:

I.          To the extent the proceeds compensate the taxpayer for loss of income:

A.          The proceeds are fully excludable if the taxpayer paid the premiums.

B.          The proceeds are includable only to the extent they qualify under sick-pay exclusion rules, if the taxpayer's employer paid the premiums.

C.          If both the taxpayer and his employer paid the premiums the proceeds must be allocated based on the cost to each.

II.          To the extent the proceeds compensate the taxpayer for loss of a member or function of his body, or for disfigurement or if they are otherwise based on the nature of the injury (rather on time missed from work) they are fully excludable regardless of who paid the premiums.

III.          If the proceeds only reimburse the taxpayer for medical care expenses:

A.          They are fully includable if they do not exceed the prior deduction.

B.          If they exceed the deduction, but do not exceed the amount paid for medical expenses, they are includable to the extent of the deduction taken for the prior year.

C.          If the taxpayer claimed the standard deduction the proceeds are fully excludable.

D.          The difference between the amount paid and deducted, regardless of who paid the premiums, is never included in income.

E.          If the proceeds exceeds the amount paid:

1.          The proceeds are excluded if the taxpayer paid the premiums.

2.          The proceeds are included if the employer paid the premium.

3.          The proceeds must be allocated if both employer and employee pay premiums.