When do capital expenditures qualify as deductible medical expenses?

• Author: Goldberg, Michael J.

With steadily rising standard deductions, as well as increases in personal incomes that limit the possibility of exceeding the 7.5%-of-adjusted-gross-income (AGI) floor, the use of the medical expense deduction has declined in recent years. Nonetheless, it may provide relief to taxpayers with unusual medical circumstances. Taxpayers who suffer from catastrophic illnesses or accidents clearly have little trouble meeting the requirements for the general deduction. However, occasionally a situation arises that does not conform to the usual concept of a deductible medical expense. Sec. 213 reads:

(a) Allowance of deduction. There shall be allowed as a deduction the expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, his spouse, or a dependent (as defined in section 152), to the extent that such expenses exceed 7.5 percent of adjusted gross income.

(d) Definitions.

(1) The term "medical care" means amounts paid--

(A) for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body,

The key term is mitigation (i.e., to lessen or alleviate). There can be no argument that for some medical conditions, all that can be done is to relieve pain or suffering. Typically, when a medical problem calls for a capital expenditure, the goal is mitigation. For instance, a patient with a respiratory or cardiac problem may be unable to climb stairs or may have impaired muscle function. These patients and their physicians are not hoping to cure the problem with an elevator or a swimming pool, but rather to alleviate symptoms or perhaps just to prevent further damage.

Capital Expenditures Qualifying as Medical Expenses

Regs. Sec. 1.213-1 (e)(1)(iii) addresses medical expenses that qualify as capital expenditures. Principally, the IRS will not disallow amounts paid that otherwise qualify as medical expenses simply because they are capital in nature. However, if a taxpayer claims a medical capital expenditure, he must meet the following criteria:

* The expenditure must have as its primary purpose the medical care of the taxpayer, his spouse or his dependents and

* It must be related only to the sick person, not to the permanent improvement of property; or

* If the expenditure is for the betterment of property, only the portion that exceeds the increase in the property's value may be claimed.

Moreover, the cost of operating and maintaining the capital asset is deductible. According to Regs. Sec. 1.213-1, if the initial capital expenditure qualified as a medical expense, the full cost of its operation and maintenance...