With tax deduction limits coming for 2013, medically related home upgrades are a smart project this year.
What a difference year makes.
For the 2012 tax year, you can take a tax deduction on medically necessary home improvements — like installing a wheelchair ramp and other projects that make life easier for an ill or injured family member — if you:
- Itemize deductions
- Spend more than 7.5% of your adjusted gross income on the upgrades (10% of AGI if you’re subject to alternative minimum tax).
Starting in 2013, if you’re under age 65, you can’t take the tax deduction on medical expenses until you spend 10% of your AGI. But if you’re 65 or older in 2013, you can stick with the 7.5% AGI tax deduction threshold through the end of 2016.
The rules for tax deductions on medical home improvements are tricky:
1. Start with what it costs to modify your home.
2. Subtract the value the upgrades add to your home.
3. What’s leftover is your tax deduction — if you meet your AGI threshold.
How it works
Say you’re 45 years old and spend $20,000 to put a bathroom on the first floor of your home because your husband can’t climb stairs anymore. Your AGI is $100,000. A REALTOR® says the bathroom adds $10,000 to the value of your house.
1. Start with the cost of the improvements: $20,000
2. Subtract your added home value: $10,000
3. Of that $10,000 difference, you can only take a deduction for expenses that exceed 7.5% of your AGI or $7,500.
So if you itemize, you can take a $2,500 deduction for the 2012 tax year. Wait until 2013 and you get no deduction because your threshold rises to 10%. If you’re over age 65, though, you can claim a $2,500 deduction.
Tip: Doing all your improvements in a single year will help you meet the AGI threshold.
Some of the improvements that you can claim a tax deduction for, according to IRS Publication 502, “Medical and Dental Expenses”:
- Entrance ramps for your home
- Grading the yard before building a ramp, or to make it easier to get in your home
- Widening exterior or interior doorways
- Widening or removing hallways
- Installing railings, support bars, or other bathroom improvements
- Lowering or modifying kitchen cabinets and equipment
- Moving or modifying electrical outlets and fixtures
- Installing porch lifts and other forms of lifts (but elevators generally add value to the house)
- Modifying fire alarms, smoke detectors, and other warning systems
- Modifying stairways
- Adding handrails or grab bars anywhere (whether or not in bathrooms)
- Changing door knobs
- Upkeep of medically necessary upgrades, like elevators, and operating costs
- Lead-based paint removal if your child has lead poisoning
- Renovating an existing bathroom to make it handicap accessible or adding a new accessible bath
Will the tax change encourage you to make necessary changes this year?