When are home renovations considered a medical expense?

Living with a disability or chronic condition can be challenging. Whether your clients are in a wheelchair or suffering from a heart condition, they might be able to take tax deductions for home improvements made for medical purposes. The tax code sets the bar high for medical deductions, but the payoff could be worth it if the renovations are substantial.

To begin with, a client must itemize deductions instead of taking the standard deduction. Starting in tax year 2018, the Tax Cuts and Jobs Act increased the standard deduction from $6,500 to $12,000 for single filers, and $13,000 to $24,000 for taxpayers who are married filing jointly. For tax year 2019, the standard deduction is $12,200 for single filers and $24,400 for taxpayers who are married filing jointly.

If medical expenses and other itemized expenses exceed the amount of the client’s standard deduction, they can itemize deductions on Schedule A of Form 1040. Only expenses that are not reimbursed by insurance, or otherwise paid for, qualify toward the deduction.

Medical expenses must be greater than 7.5 percent of gross income before they are deductible. For example, if gross income is $100,000, the first $7,500 of medical expenses do not count. To help get over the medical deduction floor, calculate ordinary medical payments such as doctors, dentists, hospitals, eyeglasses and medications.

If a home renovation is costly enough to push the client over the medical deduction floor, there is another caveat to consider when calculating the deduction. The cost of the renovation is only deductible to the extent that it does not add value to the home. For example, let’s say the client puts in a bathroom downstairs because of arthritis or a heart condition. The renovation costs $25,000 and adds $15,000 to the value of the home. The medical deduction is limited to $10,000.

Be sure you consider the total value of the renovation cost, including related expenses such as electricity, maintenance or service contracts, when determining how much is deductible.

The following expenditures generally do not increase the value of a home, so they are eligible in full for the medical expense deduction, subject to the nondeductible floor of 7.5 percent). The accommodations must be recommended by a doctor to relieve the disability of the taxpayer, the taxpayer’s spouse or dependents who live there:

• Construction of entrance or exit ramps.
• Widening doorways at entrances or exits.
• Widening or otherwise modifying hallways and interior doorways.
• Installing railing, support bars or other modifications to bathrooms.
• Lowering or modifying to kitchen cabinets and equipment.
• Installing porch lifts and other forms of lifts (except elevators).
• Altering the location or otherwise modifying electrical outlets and fixtures.
• Modifying fire alarms, smoke detectors and other warning systems.
• Modifying stairs.
• Adding handrails or grab bars, whether or not they are in bathrooms.
• Modifying hardware on doors.
• Modifying areas in front entrance and exit doorways.
• Grading of ground to provide access to the residence.

Note: Different rules apply when a tenant makes doctor-recommended improvements to a rental property. The entire cost of the renovation is a qualified medical expense because they do not benefit if the value of the home increases.

As always, it is crucial to help your clients document medical expenses by keeping invoices and payment records for the work done. It is also vital that they have a written recommendation from their doctor explaining why they medically benefit from such improvements. An appraisal to show how much the improvement increases the value of the house will help justify the calculation of the deduction and should be retained.