Normally, you won’t derive any tax benefits for the cost of major renovations or additions to your home, such as replacing your roof or installing a deck. These home improvements typically increase the value of your home, but they are purely personal expenses. Unless…
In certain limited situations, you may realize a tax break for a home improvement that is deemed to be medically necessary. If you qualify, a portion of the expense is deductible as a medical expense as long as you itemize deductions. But there is a major obstacle to overcome.
Background: Currently, you can deduct unreimbursed medical expenses in excess of 7.5% of your AGI, down from 10% of AGI. The medical expense deduction threshold had see-sawed back and forth for several years between 10% and 7.5% of AGI, but recent legislation made the lower threshold a permanent part of the tax code, beginning in 2021.
Nevertheless, this deduction threshold remains daunting for most taxpayers. For example, if you have an annual AGI of $100,000 and incur $8,500 in qualified medical expenses, your deduction is limited to just $1,000. If you have $7,000 in qualified medical expenses, you get no deduction.
What types of expenses qualify for the deduction? The cost must be incurred primarily for the prevention or alleviation of a physical or mental defect or illness. Conversely, an expense that is merely beneficial to your general health isn’t deductible.
When you make a home improvement that is medically necessary, the deductible amount is limited to the cost above the resulting increase in the home’s value.
Example: Say that your annual AGI is $100,000 and you expect to have $5,000 in unreimbursed medical and dental expenses this year. To help alleviate your arthritis, you install an in-ground swimming pool in your backyard. The pool costs $35,000, plus you cough up $15,000 more for fencing and landscaping around the pool.
An independent appraiser estimates that the improvements will increase your home’s value by $25,000, or half of your out-of-pocket costs.
Without the home improvements, you can’t claim any medical expense deduction in 2022, because your total unreimbursed medical expenses don’t exceed 7.5% of your AGI. However, $25,000 of the cost of the pool and related expenses now qualifies for the medical deduction. That leads to a completely different—
Tax result: Now you’re entitled to a deduction in 2022 of $22,500 ($30,000 – $7,500!
A few other common examples of home improvements that may be deductible as medical expenses are air conditioning installed to alleviate a child’s asthma, an elevator constructed for an adult with a heart condition and special access modifications for a disabled person. The IRS provides a comprehensive list of qualified expenses in Pub. 502 (Medical and Dental Expenses).
Reminder: Be sure to obtain a written appraisal from an independent real estate expert regarding the increase in your home’s value due to the home improvement. Finally, if a physician recommends a home improvement to alleviate a health condition, get it in writing!
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Tags: Benefits, Income Tax, IRS, Taxes
