Home Improvements May Qualify as Medical Expenses on Taxes

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!