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According to the Social Security Administration, as of 2019, 16% of Americans were age 65 or older. Each day approximately 10,000 baby boomers reach the age of 65, with all boomers reaching 65 by 2030. Boomers aren’t the only reason the nation’s overall population is aging – people are living longer due in part to better health care (even though deaths from COVID-19 have lowered life expectancy projections).
With aging comes a greater likelihood of injury. The Centers for Disease Control has stated that falls are the leading cause of injuries among people age 65 and older, and nearly 30% of older adults reported falling at least once in the preceding 12 months. To help minimize falls and accommodate age-related infirmities, many people are adding grab bars in showers, modifying stairways, widening hallways to accommodate a wheelchair, and other projects to make the home safer and more accessible for older occupants. If you are planning to make these type of home improvements, you may be eligible to claim the costs as a medical expense for income tax purposes.
Generally, the costs of home improvements are not deductible except to offset home gain when the home is sold. However, a medical expense deduction may be claimed when the primary purpose of the home modification is a medical reason. The tax law says that deductible medical expenses are those paid for the “diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body.”
So, if you are making the modification to accommodate a medical condition or need of you, your spouse, or a dependent, then the cost of the modification may be deductible as a medical expense, but only to the extent that it exceeds any resulting increase in the property’s value.
Example: A doctor recommends that his patient with severe arthritis have daily hydrotherapy, and so the individual has a hot tub installed at a cost of $21,000. The individual then hires a certified home appraiser to determine how much the hot tub addition increased the home’s value. The appraiser concludes the increase is $20,000. The individual’s medical deduction for the year the hot tub is installed will be limited to $1,000 ($21,000 – $20,000). The other $20,000 of expenses will increase the home’s basis, meaning that it will add to the home’s cost and will offset the sales price when the home is sold.
Even though a prescription from a doctor isn’t required for most medically related home modifications, the taxpayer, if questioned by the IRS, needs to be able to demonstrate how the expenditure relates to their medical care or that of a spouse or dependent. Having a letter from the individual’s doctor that explains the type of modifications that would be medically beneficial would help to prove a medical need.
Not all improvements result in an increased home value. In fact, some modifications, such as lowering cabinets for an occupant confined to a wheelchair, may decrease the home’s resale value.
The IRS has identified certain improvements that don’t usually increase a home’s value but for which the full cost can be included as a medical expense. These improvements include, but are not limited to, the following items:
Only reasonable costs to accommodate a home for a disabled condition or for an elderly individual are considered medical care costs. Additional costs for personal preferences, such as for architectural or aesthetic reasons, are not medical expenses (but could be additions to the home’s tax basis).
Unfortunately, the total of all medical expenses can be deducted only to the extent that they exceed 7.5% of the taxpayer’s adjusted gross income (AGI) and only if the taxpayer itemizes deductions. With the current high value of the standard deductions, fewer than 15% of taxpayers are expected to itemize their deductions through 2025. So even if a medically needed home improvement is made and qualifies to be deducted, only a small percentage of taxpayers will end up with a tax benefit because of the expenditure.
All is not lost, though. To the extent that the taxpayer doesn’t claim the expense as an itemized deduction, the improvement costs, including those that might not meet the medically necessary standard, can be added to the home’s purchase cost to determine the home’s tax basis. Thus, when the home is sold, the capital gain from the sale will be lower.
Either to substantiate the currently deductible improvements or with a future home sale in mind, taxpayers should keep records of the home improvements they make, including receipts.
If you would like to discuss the tax deductibility of an improvement you are making to your home for medical purposes, please call the Cray Kaiser tax experts at (630) 953-4900.
