Medical Expense Deduction – Still Confusing for Affordable Housing Managers

There are five possible deductions that owners of federally subsidized properties (e.g., Section 8 and Rural Development (RD) Rental Assistance) may subtract from annual income based on allowable family expenses and family characteristics. The remaining income, after these deductions are subtracted, is called adjusted income. Adjusted income is generally the amount upon which rent is based (it also determines eligibility for the RD Section 515 Program).

Of the five possible deductions, three are available to any family living in a subsidized unit and two are permitted only for elderly and disabled families. The three types of deductions available to any family in a subsidized unit are:

  1. A deduction for dependents;
  2. A childcare deduction; and
  3. A disability assistance deduction.

The two types of deductions permitted only for families in which the head or spouse is elderly, or disabled are:

  1. A deduction for unreimbursed medical expenses; and
  2. An elderly/disabled family deduction.

It is the deduction for medical expenses that creates the most confusion for managers of affordable housing.

If the household is eligible for a medical expense deduction, owners must include the unreimbursed medical expenses of all household members, including the expenses of nonelderly adults or children living in the family. For example, if a 15-year-old grandchild lives with a 70-year-old head of household, the medical expenses of both household members are deducted.

Medical expenses include all expenses the family anticipates during the 12 months following certification or recertification if the expenses are not reimbursed by an outside source, such as insurance.

Knowing what to allow as a medical expense is often difficult, and while there is no absolute list of allowable medical expenses, the following are the most common types of expenses that may be deducted:

  • Services of recognized health care professionals. This includes services of physicians, nurses, dentists, opticians, mental health practitioners, osteopaths, chiropractors, Christian Science practitioners, and acupuncture practitioners;
  • Services of health care facilities, laboratory fees, x-rays, diagnostic tests, blood, and oxygen. These may include hospitals, health maintenance organizations (HMOs), laser eye surgery, outpatient medical facilities, and clinic fees;
  • Alcoholism and drug addiction treatment;
  • Medical insurance premiums, including expenses paid to an HMO, Medicaid insurance payments that haven’t been reimbursed, and long-term care premiums (not prorated);
  • Prescription and non-prescription medicines. Non-prescription medicines may be deducted only if prescribed by a physician for a specific medical condition;
  • Transportation to and from treatment and lodging based on actual cost (e.g., bus fare) or, if driving a car, a mileage rate based on IRS rules (currently 62.5 cents per mile);
  • Medical care cost of permanently institutionalized family members if their income is included in annual income;
  • Service animals are allowable medical expenses in IRS Publication 502, which HUD recommends using as a standard for determining allowable medical expenses.
    • The expense would have to meet the definition of either a disability assistance expense or a medical expense to be deducted.
    • For HUD purposes, this also includes expenses relating to a support animal, if the need for such an animal is verified by a licensed health professional.
  • Dental treatments such as fees paid to a dentist, x-rays, fillings, braces, extractions, and dentures;
  • Eyeglasses, contact lenses;
  • Hearing aid and batteries, wheelchair, walker, artificial limbs, Braille books and magazines, and oxygen and oxygen equipment. This includes the purchase and upkeep of the equipment such as additional utility costs to the tenant because of an oxygen machine (for sites with tenant-paid utilities only);
  • Attendant care or periodic medical care such as nursing services; assistance animal and its upkeep; and
  • Payments on accumulated medical bills (scheduled/feasible payments only).

It is also important that managers recognize nondeductible medical expenses, keeping in mind that applicants/residents will often seek to include every conceivable medical cost as an expense. Typical nondeductible medical expenses include:

  • Unnecessary cosmetic surgery.
    • This applies to any procedure that’s directed at improving the patient’s appearance and doesn’t meaningfully promote the proper function of the body or prevent or treat illness or disease.
    • Procedures such as face-lifts, hair transplants, hair removal (electrolysis), and liposuction generally aren’t deductible.
    • However, if medical complications, such as infections, occur as a result of the procedure and require medical treatment, the medical treatment expenses would be treated as a medical expense deduction.
    • Amounts paid for cosmetic surgery may be deducted if necessary to improve a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or a disfiguring disease;
  • Health club dues, such as membership in any club organized for business, pleasure, recreation, or another social purpose, such as YMCA dues, or amounts paid for steam baths for general health or to relieve physical or mental discomfort not related to a particular medical condition;
  • Household help expenses, even if such help is recommended by a doctor. However, persons providing nursing-type services may be deducted. Also, certain maintenance or personal care services provided for long-term care may be deducted;
  • Medical savings account (MSA), such as an Archer MSA;
  • Nutritional supplements, vitamins, herbal supplements, and natural medicines.
    • However, these may be deducted if they are recommended in writing by a medical practitioner licensed in the locality where practicing.These items must be recommended as a treatment for a specific medical condition diagnosed by a physician or other health care provider licensed to make a diagnosis in the locality where practicing.
    • Otherwise, these items are taken to maintain ordinary good health and are not for medical care;
  • Personal use items. Items ordinarily used for personal, living, or family purposes may not be deducted unless the item is used primarily to prevent or alleviate a physical or mental defect or illness.
    • For example, the cost of a wig purchased upon the advice of a physician for the mental health of a patient who has lost all of his or her hair from disease, or incontinence supplies can be included with medical expenses; and
  • Non-prescription medicines. These are not included in medical expenses unless they’re recommended in writing by a licensed medical professional in the locality where practicing.
    • The items must be recommended as a treatment for a specific medical condition diagnosed by a physician or other health care provider licensed to make a diagnosis.

Bottom Line: Managers of federally – assisted housing properties need to be fully versed in allowable medical expenses. The guidance provided here and in HUD Handbook 4350.3, Change 4 will serve as a comprehensive resource for determining those expenses.