The Land of Milk and Money

Tax breaks come and tax breaks go. In today's era of trillion-dollar deficits, even sacred cows like the mortgage interest deduction have come under fire. But one longtime tax break appears to remain safe, even as lawmakers gradually chip away at it. That's the deduction for medical and dental expenses. The Joint Committee on Taxation estimates that for 2011, the deduction for employer-provided health insurance and benefits will save taxpayers $115.2 billion. Deductions for medical, dental, and long-term care expenses will save $15.5 billion more.

Internal Revenue Code Section 105 (which excludes employer-paid health insurance and other benefits from your taxable income) and Section 213 (which lets you deduct your medical and dental expenses) have both been law since 1954. You would think, after all those years, the topic of "medical deductions" would be pretty settled. But you might be surprised to learn just how much taxpayers and the IRS clash over the limits of medical deductions. So with most of the country headed into the worst of flu and cold season, let's take a look at some of the more intriguing recent developments in medical deductions:

• The IRS denied a request from the American Academy of Pediatrics to make breast-feeding costs a deductible medical expense. Although one study found that antibodies passed from mother to child could prevent the premature deaths of up to 900 babies per year, the IRS considers breast milk to be "nutrition" rather than "medicine."

• The IRS issued an opinion stating that the cost of an "herb" may be a deductible medical expense if: (1) the taxpayer can substantiate that they have a medical condition, (2) they're purchasing the herb to treat or alleviate that condition, and (3) and they wouldn't have bought the herb "but for" that condition. However, the IRS still just says no to deductions for medical marijuana — even when prescribed by a state-licensed physician — because marijuana remains illegal under federal law.

• Would you believe that sex change surgery is a deductible expense? The Tax Court just issued a 139-page opinion ruling that gender identity disorder is a "disease" under Code Sections 213(d)(1)(A) & (9)(B) and the taxpayer's hormone therapy and surgery were for "treatment" of that disease under those same sections. But in the same case, the Court also ruled that the taxpayer's breast augmentation was merely directed at improving her appearance and thus qualified as nondeductible "cosmetic surgery" under Code Section 213(d)(9)(a).

• Finally, the Tax Court shot down deductions for $108,086 in visits to prostitutes and $7,373 in pornographic books, magazines, and other materials. The taxpayer, a 77-year-old tax attorney (I know, Ripley's didn't believe it either), argued they were reasonable expenses to fight depression and erectile dysfunction brought on by age. The Court noted that: (1) none of those expenses were incurred as part of any course of therapy prescribed by a doctor, (2) patronizing prostitutes is illegal in New York, and (3) really, the taxpayer should have known better!

Medical expenses in general are getting harder to deduct. Last year's health care reform raises the threshold for deducting medical and dental expenses, effective 2013, from 7.5% to 10% of adjusted gross income. (If you're self-employed or buying your own insurance, ask us if a Medical Expense Reimbursement Plan or Health Savings Account might help avoid those limits entirely!)

Now let's sew this all up. If your doctor told you you needed surgery, you'd ask for a second opinion, right? Well, the IRS performs surgery every day. They remove cash from your wallet — and they don't use anesthesia! So if you're not already doing business with us, and you'd like a second opinion on your taxes, call us! If you already are doing business with us, and you have friends, family, or colleagues who'd like that second opinion, send them our way!