IRS rules for medical deductions are sickening

By Robert W. Wood

updated 9:40 a.m. ET Oct. 31, 2009

Long before "Dirty Jobs" premiered on reality TV, we all understood that some jobs are ickier than others and that we really shouldn't hold an unpleasant job against the person doing it. Hence, the cliché: "Don't shoot the messenger."

In the U.S. today, tax collection is seen by many as a dirty job. In fact, some Internal Revenue Service workers are so worried about harassment, violence or just shunning that they use pseudonyms when interacting with the public.

You don't want to hold the tax code against IRS employees whose job it is to interpret, administer and enforce it. Still, there are times when you have to wonder whether the legal technocrats toiling away at the IRS' fortress-like Washington headquarters have lost touch with the common man.

That's how I felt when I read the IRS' take on deducting baby formula as a medical expense. In Private Letter Ruling 200941003, released publicly this month, the IRS denied the request of a mother who had undergone a double-mastectomy that she be allowed to deduct as a medical expense the cost of her baby's infant formula.

The IRS presumably gets more public sympathy for its successful position in another recent case, this time before the Tax Court. The topic? Prostitution expenses. In this case, a 78-year-old lawyer (a putative tax lawyer, I'm sad to say) claimed medical deductions for therapeutic "treatments" from members of the world's oldest profession, as well as for the purchase of pornography. In Halby v. Commissioner, TC Memo 2009-204 (2009), the Tax Court cut him off, although Halby is appealing.

The Tax Court had an easy time backing the IRS, since the lawyer had no doctor's note saying he needed this "cure." Besides, the self-prescribed treatment was illegal.

Few taxpayers have the chutzpah to try to write off prostitutes. Still, over the years, taxpayers have successfully written off everything from swimming pools to patio awnings to clarinet lessons (needed for a dental problem) as medical expenses.

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If you're considering deducting medical expenses, here's what you need to know.

Medical expenses are deductible as a "miscellaneous itemized deduction" only to the extent they exceed 7.5 percent of your adjusted gross income. So if your adjusted gross income is $100,000, the first $7,500 of medical expenses is on you. Still, with medical expenses rising, more Americans are meeting that hurdle — 10.5 million taxpayers deducted an estimated $76 billion in medical expenses in 2007, up from 8.6 million who deducted $56 billion in 2004.

It easier than you might think to exceed 7.5 percent, since you have fairly wide latitude as to what qualifies. The deduction is allowed for out of pocket spending on the medical care of a taxpayer, spouse or a dependent. Medical care includes diagnosis, cure, mitigation, treatment or prevention of a disease or disability. Dental, vision and psychiatric conditions all qualify.

Mitigation, in particular, covers a lot of expensive territory, The IRS has said that false teeth, prescription eyeglasses or contact lenses, laser eye surgery, hearing aids, crutches, wheelchairs and guide dogs for the blind or deaf are all deductible medical expenses. You can also deduct premiums you pay for nursing home and health insurance. (If you're self-employed, you don't have to meet the 7.5 percent threshold to deduct health insurance.)

Not surprisingly, you can't deduct expenses covered by insurance or those paid from otherwise tax-advantage accounts, such as Flexible Spending Accounts or Health Savings Accounts.

If it's special, medically required food you're claiming, you'll need a statement from your doctor. Plus, no matter what your doctor says, you need to make sure the food items don't substitute for something else you would otherwise be consuming. For that reason, prescribed low calorie foods don't qualify as medical expenses, since they are substitutes for the food you would normally consume to satisfy nutritional requirements.

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