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Lessons from the Tax Court: Unusual medical costs

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in Small Business Tax,Small Business Tax Deduction Strategies

The tax law allows you to deduct medical expenses incurred for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body for the individual or the individual’s spouse or dependents. These expenses are counted up at the end of the year. If the total exceeds 7.5% of your adjusted gross income (AGI), you can deduct the excess.

On the other hand, cosmetic treatments are generally not deductible.

Strategy: Don’t dismiss or ignore an expense simply because it’s unusual. As long as it qualifies and isn’t cosmetic, add it to your total. It could push you over the 7.5%-of-AGI mark.

Depending on the amount at stake, you might even fight the IRS if challenged. In a new case, the Tax Court ruled in favor of a taxpayer who claimed approximately $5,000 in medical deductions for expenses relating to a sex-change operation.

The taxpayer, who was born male, was diagnosed in 1997 with “gender-identity disorder.” Her doctors recommended sex-change surgery, claiming it was a medical necessity. She underwent hormone therapy, sex-reassignment surgery and breast augmentation surgery in 2001. Then she claimed a medical expense deduction for the cost of the surgeries, transportation, feminizing hormones and other related expenses.

The taxpayer received a tax refund, but was audited six months later. The matter progressed to the Tax Court.

At trial, the Tax Court said the taxpayer’s hormone therapy and sex-reassignment surgery were incurred for the treatment of a disease. Therefore, these costs constituted tax-deductible medical expenses and were not cosmetic. (O’Donnabhain, 134 TC No. 4)

Obviously, this is an offbeat case, but you get the idea. If the cost qualifies, deduct it.

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