Individual And Small Business Deductions

<div class="Section1">The 2017 tax reform legislation created a special rule to allow partnerships to carry forward certain disallowed business interest (the rule does not apply to S corporations or other pass-through entities, although the new law specifies that similar rules will apply).&nbsp;The general rules governing carrying forward disallowed business interest (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>) do not apply to partnerships.<div class="Section1"><br /> <br /> Instead, disallowed business interest is allocated to each partner in the same manner as non-separately stated taxable income or loss of the partnership.<a href="#_ftn1" name="_ftnref1">¹</a>&nbsp;The partner is entitled to deduct his or her share of excess business interest in any future year, but only:<br /> <blockquote>(1)&nbsp;&nbsp; against excess taxable income (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>) attributed to the partner by the partnership, and<br /> <br /> (2)&nbsp;&nbsp; when the excess taxable income is related to the activities that created the excess business interest carryforward.<a href="#_ftn2" name="_ftnref2">²</a></blockquote><br /> Such a deduction also requires a corresponding reduction in excess taxable income. Further, if excess business interest is attributed to a partner, his or her basis in the partnership interest is reduced (not below zero) by the amount of the allocation even though the carryforward does not permit a partner&rsquo;s deduction in the year of the basis reduction.&nbsp;The partner&rsquo;s deduction in a future year for the carried forward interest will <em>not</em> require another basis adjustment.<br /> <br /> If the partner disposes of the partnership interest after a basis adjustment occurred, immediately before the disposition the partner&rsquo;s basis will be increased by the amount that any basis reduction exceeds the amount of excess interest expense that has been deducted by the partner.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> The IRS has released proposed regulations stating that business interest is first accounted for at the partner level, and then allocated to the partners. A partner cannot later include his or her share of the partnership&rsquo;s business interest income for the year except to the extent of the partner&rsquo;s share of the excess of (i) the partnership&rsquo;s business interest income over (ii) the partnership&rsquo;s business interest expense (excluding floor plan financing). A partner cannot include his or her share of floor plan financing interest in determining his or her individual business interest expense deduction limitation.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> for a discussion of the general rules governing the corporate deduction for business interest.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&nbsp;163(j)(4).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; IRC &sect;&nbsp;163(j)(4)(B).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; IRC &sect;&nbsp;163(j)(4)(B)(iii).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; Notice 2018-28.<br /> <br /> </div></div><br />

<p> Businesses that operate as pass-through entities (partnerships, S corporations, sole proprietorships) are permitted to deduct interest expenses incurred in operating the business. The 2017 tax reform legislation generally limits the interest expense deduction to the sum of (1) business interest income, (2) 30 percent of the business' adjusted taxable income and (3) floor plan financing interest.¹ Businesses with average annual gross receipts of $32 million for 2026 ($31 million in 2025, $30 million in 2024, $29 million in 2023, $27 million in 2022, $26 million in 2019-2021) for the three-taxable year period that ends with the previous tax year are exempt from this new limitation (i.e., businesses that meet the gross receipts test of IRC Section 448(c)).² <em><em>See</em></em> Q for more information on the small business exemption. </p><p> These rules are applied at the partnership level, and the deduction for business interest must be taken into account in determining the non-separately stated taxable income or loss of the partnership.³ Under the 2017 tax reform legislation, the limit on the amount that is allowed as a deduction for business interest is increased by a partner's distributive share of the partnership's excess taxable income.⁴</p><p> "Excess taxable income" is the amount that bears the same ratio to the partnership's adjusted taxable income as: <br/><blockquote>(x) the excess (if any) of (1) 30 percent of the adjusted taxable income of the partnership over (2) the amount (if any) by which the business in-terest of the partnership, reduced by floor plan financing interest, ex-ceeds the business interest income of the partnership bears to (y) 30 percent of the adjusted taxable income of the partnership.5 </blockquote><br/> Excess taxable income must be allocated in the same manner as non-separately stated income and loss. A partner's adjusted basis in his or her partnership interest must be reduced (not below zero) by the excess business interest that is allocated to the partner. The new law provides that similar rules will apply to S corporations and their shareholders.⁶</p><p> As expressed in the Senate amendment to the 2017 tax reform legislation, the intent of this calculation was to allow a partner to deduct additional interest expense that the partner may have paid to the extent that the partnership could have deducted more business interest. </p><p> "Business interest" means interest paid on indebtedness that is properly allocated to a trade or business, but excluding investment interest.⁷ The final regulations released in 2020 specifically exclude commitment fees and debt issuance costs from the definition of interest. While partnership guaranteed payments and hedging gains or losses are not specifically included in the definition of business interest, examples in the regulations provide guidance on when such payments may be included. The final regulations retain substitute interest payments in the definition of interest because the payments generally are economically equivalent to interest. However, the final regulations provide that a substitute interest payment is treated as interest expense to the payor only if the payment relates to a sale-repurchase or securities lending transaction that is not entered into by the payor in the payor's ordinary course of business. Further, the rules provide that a substitute interest payment is treated as interest income to the recipient only if the payment relates to a sale-repurchase or securities lending transaction that is not entered into by the recipient in the recipient's ordinary course of business. </p><p> "Business interest income" means the amount of interest income that is included in the entity's income and properly allocated to a trade or business, excluding investment interest income.⁸</p><p> "Trade or business" specifically excludes the trade or business of being an employee, any electing real property trades or businesses, electing farming businesses, furnishing or selling electrical, water or sewage disposal services, and gas or steam distribution and transportation.⁹</p><p> "Adjusted taxable income" for purposes of these rules means taxable income computed without regard to non-business items of income, gain deduction and loss, business interest and business interest income, the net operating loss deduction under Section 172, the deduction for pass-through entities under IRC Section 199A and any deductions for depreciation, amortization or depletion.¹⁰</p><p> <em><em>See</em></em> Q for a discussion of the rules governing carryforwards of disallowed partnership business interest. <em><em>See</em></em> Q for a discussion of the general rules governing the corporate deduction for business interest. <br/><strong>CARES Act Elections</strong></p><p> The IRS gave businesses added flexibility in making and revoking elections related to business interest expense deduction under the CARES Act. A taxpayer could elect under Section 163(j)(10)(A)(iii) not to apply the 50 percent ATI limitation for a 2019 or 2020 taxable year (2020 only for partnerships). </p><p> A taxpayer permitted to make the election could elect not to apply the 50 percent ATI limitation by timely filing a federal income tax return or Form 1065 (or amendments) using the 30 percent ATI limitation. No formal statement was required to make the election. The taxpayer could then later revoke that election by filing an amended return or form using the 30 percent limit. Similarly, to use 2019 ATI for 2020, the taxpayer filed using 2019 ATI (and could later revoke that election by filing a timely amended return or form). </p><p> Partnerships could elect out of the 50 percent EBIE rule by not applying the CARES Act rule on their return, but could later revoke that election on an amended return or form.¹¹</p><p><hr align="left" size="1" width="33%"></hr></p><p> <a href="#_ftnref1">1</a>. IRC § 163(j)(1). </p><p> 2. IRC §§ 163(j)(2), 448(c). </p><p> 3. IRC § 163(j)(4). </p><p> 4. IRC § 163(j)(4)(A)(ii)(II). </p><p> 5. IRC § 163(j)(4)(C). </p><p> 6. IRC § 163(j)(4)(D). </p><p> 7. IRC § 163(j)(5). </p><p> 8. IRC § 163(j)(6). </p><p> 9. IRC § 163(j)(7). </p><p> 10. IRC § 163(j)(8). </p><p> <a href="#_ftnref14">11</a>. Rev. Proc. 2020-22. </p>

<p> Under pre-2018 law, business owners were typically permitted to deduct interest expenses incurred in carrying on a trade or business (subject to limitations).¹ The 2017 tax reform legislation generally limits the interest expense deduction to the sum of (1) business interest income, (2) 30 percent of the business' adjusted taxable income (ATI) and (3) floor plan financing interest (<em><em>see</em></em> below).² Businesses with average annual gross receipts of $25 million ($32 million in 2026) or less for the three-taxable year period that ends with the previous tax year are exempt from this new limitation (i.e., businesses that meet the gross receipts test of IRC Section 448(c)).³</p><p> Generally, the limit applies at the taxpayer level, but in the case of a group of affiliated corporations that file a consolidated return, it applies at the consolidated tax return filing level. </p><p> "Business interest" generally excludes investment interest. It includes any interest paid or accrued on indebtedness properly allocable to carrying on a trade or business. "Business interest income" means the amount of interest that is included in the taxpayer's gross income for the tax year that is properly allocable to carrying on a trade or business. </p><p> "Adjusted taxable income" means taxable income computed without regard to (1) items of income, gain, deduction or loss not allocable to carrying on a trade or business, (2) business interest or business interest income, (3) any net operating loss deduction (NOL), (4) the deduction for pass-through income under Section 199A⁴ and (5) for years before 2022, any deduction for depreciation, amortization or depletion.⁵ For the purpose of the business interest deduction, adjusted taxable income is computed without regard for the deductions that are allowed for depreciation, amortization or depletion for tax years beginning after December 31, 2017 and before January 1, 2022. </p><p><hr></hr></p><p> <strong>Planning Point:</strong> In a chief counsel memorandum, the IRS found that to determine the allowable business interest expense deduction, ATI for the year includes any adjustments required under IRC Section 481(a) because of a change in accounting method for depreciation. The taxpayer in question here filed a Form 3115 to change accounting methods for depreciation for certain property placed in service during the 2017 tax year. The taxpayer had classified the property as seven-year property and later determined that the property should properly be classified as five-year property. The taxpayer then changed from an impermissible to permissible method of depreciating the property, resulting in a negative adjustment for the year of change (the taxpayer elected to forgo additional first year depreciation under Section 168(k)). According to the non-precedential memo, that adjustment must be reflected in the business' ATI for the tax year.⁶</p><p><hr></hr></p><p> "Floor plan financing interest" is interest paid or accrued on floor plan financing indebtedness, which is indebtedness incurred to finance the purchase of motor vehicles held for sale or lease to retail customers (and secured by the inventory that is acquired).⁶For tax years beginning in 2025 and beyond, the definition of "motor vehicle" for floor plan financing purposes in the business interest context was modified to include any trailer or camper which is designed to provide temporary living quarters for recreational, camping, or seasonal use and is designed to be towed by, or affixed to, a motor vehicle.⁷</p><p> As a result of these rules, business interest income and floor plan financing interest are fully deductible, with the limitation applying to 30 percent of the business' adjusted taxable income. </p><p> Unused interest expense deductions may be carried forward indefinitely.⁸</p><p><strong>CARES Act Elections</strong></p><p><b> </b>The CARES Act increased the 30&nbsp;percent limit to 50&nbsp;percent for tax years beginning in 2019 and 2020.⁹ All entities (corporations and pass-throughs) could elect to use 2019 ATI instead of 2020 ATI in determining the 2020 business interest expense deduction, which often increased the business interest deduction for businesses who experienced reduced income levels in 2020.¹⁰ See heading below for information about making and revoking the election.</p><p> The IRS gave businesses substantial flexibility in making and revoking elections related to business interest expense deduction under the CARES Act. A taxpayer could elect under Section 163(j)(10)(A)(iii) not to apply the 50 percent ATI limitation for a 2019 or 2020 taxable year (2020 only for partnerships). </p><p> A taxpayer permitted to make the election could elect not to apply the 50 percent ATI limitation by timely filing a federal income tax return or Form 1065 (or amendments) using the 30 percent ATI limitation. No formal statement was required to make the election. The taxpayer could then later revoke that election by filing an amended return or form using the 30 percent limit. Similarly, to use 2019 ATI for 2020, the taxpayer merely filed using 2019 ATI (and could then later revoke that election by filing a timely amended return or form). </p><p> Partnerships elected out of the 50 percent EBIE rule by not applying the CARES Act rule on their return, and could later revoke that election on an amended return or form.¹¹</p><p><hr align="left" size="1" width="33%"></hr></p><p> 1. IRC § 163(j). </p><p> 2. IRC § 163(j)(1). </p><p> 3. IRC §§ 163(j)(2), 448(c). </p><p> 4. IRC § 163(j)(8).</p><p> 5. IRC § 163(j)(8). &nbsp;&nbsp;&nbsp;</p><p> 6. OCC Memo 20213007. </p><p> 7. IRC § 163(j)(9). </p><p> 8. IRC §&nbsp;163(j)(2).</p><p> 9. IRC § 163(j)(10)(A)(i).</p><p>10. IRC § 163(j)(10)(B).</p><p>11. Rev. Proc. 2020-22. </p>

<p><b>Editor's Note:</b> The 2017 tax reform legislation roughly doubled the standard deduction to $24,000 per married couple and $12,000 per individual. For heads of households, the standard deduction was increased to $18,000. For married taxpayers filing separate returns, the standard deduction was $12,000 ($15,000 for 2025).&nbsp;These amounts are indexed for inflation for tax years beginning after December&nbsp;31, 2018 and were set to expire for tax years beginning after December&nbsp;31, 2025.<a href="#_ftn1">¹</a> The 2025 OBBB made the expansion permanent and further enhanced the standard deduction. For 2025, the amounts are $15,750 for single filers, $23,625 for heads of household and $31,500 for joint filers. These amounts are permanent and will be adjusted for inflation in future years. For 2026, the amounts are $16,100 for single filers and married taxpayers filing separate returns, $32,200 for married taxpayers filing jointly and $24,150 for heads of households.</p><p>The standard deduction is one of two "below-the-line" deduction options available to taxpayers. In other words, once a taxpayer determines adjusted gross income (gross income minus above the line deductions), the taxpayer may also deduct the sum of their exemptions and the greater of 1) the standard deduction; or 2) the sum of their itemized deductions (<i>see</i> Q <a href="javascript:void(0)">8524</a>).<a href="#_ftn2">²</a></p><p><b>Planning Point:</b> Because of the increased standard deduction and the elimination of many itemized deductions, more taxpayers now choose the standard deduction under the 2017 tax reform law. Those taxpayers who wish to take advantage of the remaining itemized deductions (for example, the deduction for charitable contributions) can benefit from planning to "bunch" those deductions into a single tax year in order to ensure that itemized deductions exceed the expanded standard deduction. </p><p>Taxpayers who do not itemize and who are age 65 or older or blind are entitled to increase their standard deduction. In 2026, taxpayers who are married or are surviving spouses are each entitled to an additional deduction of $1,650 if age 65 or older, as well as an additional $1,650 deduction if blind.&nbsp;The additional standard deduction is $2,050 for 2026 for unmarried taxpayers age 65 or older as well as $2,050 for 2026 for unmarried blind taxpayers.</p><p>In 2025, taxpayers who are married or are surviving spouses are each entitled to an additional deduction of $1,600 if age 65 or older, as well as an additional $1,600 deduction if blind. The additional standard deduction is $2,000 for 2025 for unmarried taxpayers age 65 or older as well as $2,000 for 2025 for unmarried blind taxpayers.<a href="#_ftn3">³</a> The additional amounts for elderly and blind taxpayers are indexed for inflation.<a href="#_ftn4">⁴</a></p><p><hr align="left" size="1" width="33%"></hr></p><p> <a href="#_ftnref1">1</a>. IRC § 63(c)(7). </p><p> <a href="#_ftnref2">2</a>. IRC § 63. </p><p> <a href="#_ftnref3">3</a>. IRC § 63(f). </p><p> <a href="#_ftnref4">4</a>. IRC § 63(c)(4). </p>

<div class="Section1">Medical expenses of a decedent paid out of the estate within one year from the date of death are considered paid by the decedent at the time the expenses were incurred.<a href="#_ftn1" name="_ftnref1">¹</a> A decedent's medical expenses cannot be taken as an income tax deduction unless a statement is filed waiving the right to deduct them for estate tax purposes. Amounts that are not deductible under IRC Section 213 may not be treated as deductible medical expenses for estate tax purposes. Thus, expenses that do not exceed the 7.5 percent floor are not deductible.<a href="#_ftn2" name="_ftnref2">²</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 213(c).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Rev. Rul. 77-357, 1977-2 CB 328.<br /> <br /> </div>

<p><em>Editor's Note:</em> The IRS announced that personal protective equipment (PPE), such as face masks, hand sanitizer and disinfecting cleaners/wipes now count as qualified medical expenses under IRC Section 213(d). Taxpayers are, therefore, entitled to use funds from a health FSA, Archer MSA, HSA or HRA to purchase those supplies on a pre-tax basis, as long as the PPE is purchased primarily to prevent the spread of COVID-19. This change was made retroactive to January 1, 2020, although many plans will not require an amendment if the plan allows for reimbursement for all qualified Section 213(d) expenses. If an amendment with retroactive effect was necessary, it had to be made by December 31, 2022.<a href="#_ftn1">¹</a></p><p> A taxpayer who itemizes deductions can deduct unreimbursed expenses for "medical care" (the term "medical care" includes dental care) and expenses for <em>prescribed</em> drugs or insulin for himself, a spouse and dependents. The deduction is only allowed to the extent that such expenses exceed 7.5 percent of adjusted gross income for the tax year (the Consolidated Appropriations Act of 2021 permanently decreased this amount to 7.5 percent from 10 percent). (On a joint return, the percentage floor amount is based on the combined adjusted gross income of the two spouses.) </p><p> To determine whether the taxpayer is entitled to a deduction, the taxpayer first determines net unreimbursed expenses by subtracting all reimbursements received during the year from total expenses for medical care paid during the year. The taxpayer must then subtract 7.5 percent of the taxpayer's adjusted gross income from net unreimbursed medical expenses. Only the balance, if any, is deductible.<a href="#_ftn2">²</a> The deduction for medical expenses is not subject to the phase-out in itemized deductions for certain upper income taxpayers that applied prior to 2018. (<em><em>See</em></em> Q <a href="javascript:void(0)">8527</a>.) </p><p> "Medical care" is defined as amounts paid: (a) for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body; (b) for transportation primarily for and essential to such medical care; (c) for qualified long-term care services; or (d) for insurance covering such care or for any qualified long-term care insurance contract.<a href="#_ftn3">³</a></p><p> The IRS has ruled that amounts paid for diagnostic and certain similar procedures and devices are deductible medical care expenses, provided that they are not compensated by insurance or otherwise, even though the individuals had no symptoms of illness prior to incurring the expense. According to the IRS, this includes an annual physical examination, a full-body electronic scan and a pregnancy test.<a href="#_ftn4">⁴</a></p><p> The term "medical care" does not include cosmetic surgery or other similar procedures unless necessary to correct a deformity resulting from a congenital abnormality, a personal injury resulting from accident or trauma, or a disfiguring disease.<a href="#_ftn5">⁵</a> Despite this general rule, in <em>Al-Murshidi v. Commissioner</em>,<a href="#_ftn6">⁶</a> the surgical removal of excess skin from a formerly obese individual was not found to be "cosmetic surgery" for purposes of IRC Section 213(d)(9)(A) because the procedures meaningfully promoted the proper function of the individual's body and treated her disease. Therefore, the costs of the surgical procedures were deductible despite the "cosmetic surgery" classification given to the procedures by the surgeon. </p><p> The Social Security hospital tax that an individual pays as an employee or self-employed person cannot be deducted as a medical expense.<a href="#_ftn7">⁷</a> Conversely, a 65-year-old who has signed up for the supplementary medical plan under Medicare can treat monthly premiums as amounts paid for insurance covering medical care.<a href="#_ftn8">⁸</a> Premiums paid for Medicare Part D, the voluntary prescription drug insurance program that went into effect on January 1, 2006, are included in the definition of medical expenses.<a href="#_ftn9">⁹</a></p><p> The unreimbursed portion of an entrance fee for life care in a residential retirement facility that is allocable to future medical care is also deductible as a medical expense in the year paid (but, if the resident leaves the facility and receives a refund, the refund is includable in gross income to the extent it is attributable to the deduction previously allowed).<a href="#_ftn10">¹⁰</a> Either the percentage method or the actuarial method may be used to calculate the portions of monthly service fees (paid for lifetime residence in a continuing care retirement community) allocable to medical care.<a href="#_ftn11">¹¹</a> Despite this, a federal district court held that none of the entrance fee paid by married taxpayers to an assisted living facility was properly deductible as a medical expense because: <br/> (1) no portion of the entrance fee was attributable to the couple's medical care; and (2) the entrance fee was structured as a loan, which cannot serve as the basis for a deduction (the court cited <em>Commissioner v.&nbsp;Tufts</em> in reaching this conclusion<a href="#_ftn12">¹²</a>).<a href="#_ftn13">¹³</a></p><p> Amounts paid by an individual for medicines and drugs that can be purchased over-the-counter (without a doctor's prescription) are not deductible unless the individual has obtained a prescription.<a href="#_ftn14">¹⁴</a> However, amounts paid by an individual for equipment (e.g., crutches), supplies (e.g., bandages), or diagnostic devices (e.g., blood sugar test kits) may qualify as amounts paid for medical care and may be deductible under IRC Section 213. The IRS has ruled privately that crutches used to mitigate the effect of the taxpayer's injured leg and blood sugar test kits used to monitor and assist in treating the taxpayer's diabetes were amounts paid for medical care and were deductible.<a href="#_ftn15">¹⁵</a></p><p> The costs of nutritional supplements, vitamins, herbal supplements, and "natural medicines" cannot be included in medical expenses unless they are recommended by a doctor as treatment for a specific medical condition diagnosed by a doctor.<a href="#_ftn16">¹⁶</a> Certain expenses for smoking cessation programs and products are deductible as a medical expense.<a href="#_ftn17">¹⁷</a></p><p> Amounts paid by individuals for breast reconstruction surgery following a mastectomy for cancer and for vision correction surgery are medical care expenses and are deductible. Amounts paid by individuals to whiten teeth discolored as a result of age are not medical care expenses and are not deductible.<a href="#_ftn18">¹⁸</a></p><p> Costs paid by individuals for participation in a weight-loss program as treatment for a specific disease or diseases (e.g., obesity, hypertension, or heart disease) diagnosed by a physician are deductible as medical expenses. Conversely, the costs of diet food are not deductible.<a href="#_ftn19">¹⁹</a> According to IRS Publication 502, this includes fees paid by a taxpayer for membership in a weight reduction group and attendance at periodic meetings. Membership dues for a gym, health club, or spa cannot be included in medical expenses, but separate fees charged for weight loss activities can be included as medical expenses. In informational guidance, the IRS has also stated that taxpayers may deduct exercise expenses, including the cost of equipment to use in the home, if required to treat an illness (including obesity) diagnosed by a physician. For an exercise expense to be deductible, the taxpayer must establish the purpose of the expense is to treat a disease rather than to promote general health, and that the taxpayer would not have paid the expense but for this purpose.<a href="#_ftn20">²⁰</a></p><p> Expenses for childbirth classes were deductible as a medical expense to the extent that the class prepared the taxpayer for an active role in the process of childbirth.<a href="#_ftn21">²¹</a> Egg donor fees and expenses incurred in the process of obtaining a willing egg donor count as medical care expenses that are deductible.<a href="#_ftn22">²²</a></p><p> However, the IRS has declined to expand the definition to include medical costs incurred by same-sex couples attempting to have a child through surrogacy. The IRS denied a request to include expenses for egg retrieval, in vitro fertilization (IVF), the surrogate's childbirth expenses, and medical insurance, legal fees and other expenses related to the surrogacy. The IRS denied the deduction for these expenses because they were not incurred to affect the body of the taxpayer, a spouse or dependent. The IRS distinguished this situation from one in which similar treatments would actually impact the taxpayer or a spouse's body.<a href="#_ftn23">²³</a></p><p> Finally, the cost of prescribed drugs brought in or shipped from another country is deductible only if imported legally. Additionally, the cost of prescribed drugs purchased and consumed in another country are also deductible provided the drug is legal in both the other country and the United States.<a href="#_ftn24">²⁴</a></p><p><hr align="left" size="1" width="33%"></hr></p><p> <a href="#_ftnref1">1</a>. Announcement 2021-7. </p><p> <a href="#_ftnref2">2</a>. IRC § 213. </p><p> <a href="#_ftnref3">3</a>. IRC § 213(d)(1). </p><p> <a href="#_ftnref4">4</a>. Rev. Rul. 2007-72, 2007-50 IRB 1154. </p><p> <a href="#_ftnref5">5</a>. IRC § 213(d)(9); see, e.g., Let. Rul. 200344010. </p><p> <a href="#_ftnref6">6</a>. TC Summary Opinion 2001-185. </p><p> <a href="#_ftnref7">7</a>. IRC § 213(d). </p><p> <a href="#_ftnref8">8</a>. Rev. Rul. 66-216, 1966-2 CB 100. </p><p> <a href="#_ftnref9">9</a>. IRS Pub. 502, Medical and Dental Expenses. </p><p> <a href="#_ftnref10">10</a>. Rev. Rul. 76-481, 1976-2 CB 82, as clarified by Rev. Rul. 93-72, 1993-2 CB 77; Let. Rul. 8641037. </p><p> <a href="#_ftnref11">11</a>. Baker v. Commissioner, 122 TC 143 (2004). </p><p> <a href="#_ftnref12">12</a>. 461 U.S. 300, 307 (1983). </p><p> <a href="#_ftnref13">13</a>. Finzer v. United States, 496 F. Supp. 2d 954 (N.D. Ill. 2007). </p><p> <a href="#_ftnref14">14</a>. Rev. Rul. 2003-58, 2003-22 IRB 959. </p><p> <a href="#_ftnref15">15</a>. Rev. Rul. 2003-58, above; see also IRS Information Letter INFO-2003-169 (6-13-2003). </p><p> <a href="#_ftnref16">16</a>. IRS Pub. 502, Medical and Dental Expenses. </p><p> <a href="#_ftnref17">17</a>. Rev. Rul. 99-28, 1999-25 IRB 6. </p><p> <a href="#_ftnref18">18</a>. Rev. Rul. 2003-57, 2003-22 IRB 959. </p><p> <a href="#_ftnref19">19</a>. Rev. Rul. 2002-19, 2002-16 IRB 778. </p><p> <a href="#_ftnref20">20</a>. Information Letter INFO 2003-0202. </p><p> <a href="#_ftnref21">21</a>. Let. Rul. 8919009. </p><p> <a href="#_ftnref22">22</a>. Let. Rul. 200318017; see also Information Letter INFO 2005-0102 (Mar. 29, 2005). </p><p> <a href="#_ftnref23">23</a>. Let. Rul. 202114001. </p><p> <a href="#_ftnref24">24</a>. IRS Pub. 502. </p>

<p> Deductible medical expenses include amounts paid for lodging, up to $50 per individual per night, when being away from home is <em>primarily for and essential to</em> medical care if such care is provided by a physician in a licensed hospital (or similar medical care facility) and there is no element of personal pleasure, recreation or vacation in the travel away from home. No deduction is allowed if the lodgings are "lavish or extravagant."<a href="#_ftn1">¹</a> A mother was permitted to deduct lodging expenses incurred when her child was receiving medical care away from home and her presence was essential to such care.<a href="#_ftn2">²</a> A parent's costs of attending a medical conference (i.e., registration fee, transportation costs) to obtain information about a chronic disease affecting the parent's child were deductible so long as the costs were primarily for and essential to the medical care of the dependent. However, the costs of meals and lodging incurred by the parent while attending the conference were not deductible.<a href="#_ftn3">³</a></p><p><hr align="left" size="1" width="33%"></hr></p><p> <a href="#_ftnref1">1</a>. IRC § 213(d)(2). </p><p> <a href="#_ftnref2">2</a>. Let. Rul. 8516025. </p><p> <a href="#_ftnref3">3</a>. Rev. Rul. 2000-24, 2000-19 IRB 963. </p>

<p><em>Editor's Note:</em> For tax years beginning after 2020 the medical expense deduction is allowed only to the extent that such expenses exceed 7.5 percent of adjusted gross income for the tax year. The 7.5 percent floor was made permanent in the 2021 CAA. </p><p> A taxpayer can deduct the medical expenses paid for a dependent (within the specified limits, <em><em>see</em></em> Q <a href="javascript:void(0)">8548</a>) even though the taxpayer is not entitled to a dependency exemption (although the personal exemption was suspended for 2018-2025, and eliminated entirely with the 2025 OBBB, the relevant standard still applies). The fact that the dependent's income for the year exceeds the annual personal exemption amount was immaterial so long as the taxpayer has furnished over one-half of his support during that tax year. A child of parents who are divorced (or in some situations, separated) <em>and</em> who between them provide more than one-half of the child's support for the calendar year and have custody of the child for more than one-half of the calendar year will be treated as a dependent of both parents for purposes of this deduction.<a href="#_ftn1">¹</a> In the case of a multiple support agreement, however, only the person designated to take the dependency exemption (prior to 2018) may deduct the dependent's medical expenses, and then only to the extent that the designated person actually paid the expenses.<a href="#_ftn2">²</a> <em><em>See</em></em> Q <a href="javascript:void(0)">8520</a> for a discussion of which parent is entitled to take the dependency exemption. </p><p> IRS has privately ruled that taxpayers could deduct special education tuition for their children as a medical care expense where the children attended a school primarily to receive medical care in the form of special education and each child had been diagnosed as having a medical condition that handicapped the child's ability to learn in the years in which tuition was paid.<a href="#_ftn3">³</a></p><p><hr align="left" size="1" width="33%"></hr></p><p> <a href="#_ftnref1">1</a>. IRC § 213(d)(5). </p><p> <a href="#_ftnref2">2</a>. Treas. Reg. § 1.213-1(a)(3)(i). </p><p> <a href="#_ftnref3">3</a>. Let. Rul. 200521003. <em><em>See also</em></em> Let. Rul. 200729019. </p>

<div class="Section1">Generally, medical expenses are deductible only in the year they are paid, regardless of when the expenses are incurred. Despite this, in <em>Zipkin v. U.S.</em>, expenses incurred by a taxpayer to build a home to meet his wife's special health needs were properly deducted in the year the home became habitable, even though the costs had been paid in earlier years.<a href="#_ftn1" name="_ftnref1">¹</a> Costs paid by parents to modify a van used to transport their handicapped child were deductible in the year those costs were paid; however, the court held that depreciation was not a deductible medical expense.<a href="#_ftn2" name="_ftnref2">²</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  2000-2 USTC ¶ 50,863 (D. Minn. 2000).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  <em>Henderson v. Commissioner</em>, TC Memo 2000-321.<br /> <br /> </div>

<div class="Section1"><em>Editor&rsquo;s Note:</em>&nbsp;The 2017 tax reform legislation increased the 50&nbsp;percent AGI limitation on cash contributions to public charities and certain private foundations to 60&nbsp;percent.&nbsp;This provision is effective for tax years beginning after December&nbsp;31, 2017 and before January&nbsp;1, 2026.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> If an individual makes a charitable contribution to a public charity (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8542">8542</a>) of property that, if sold, would have resulted in long-term capital gain (other than certain tangible personal property, <em><em>see</em></em> below), the taxpayer is generally entitled to deduct the full fair market value of the property, but the deduction will be limited to 30&nbsp;percent of adjusted gross income.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> <em>Long-term capital gain property.</em> &ldquo;Long-term capital gain&rdquo; means &ldquo;gain from the sale or exchange of a capital asset held for more than one year, if and to the extent such gain is taken into account in computing gross income.&rdquo;<a href="#_ftn3" name="_ftnref3">³</a><br /> <blockquote><em>Example:</em> Asher owns raw land he purchased five years ago for $100,000.&nbsp;The fair market value of the land is $500,000. If Asher were to sell the land, he would recognize $400,000 long-term capital gain. Because the land is long-term capital gain property, if Asher contributes the land to a public charity, he would be entitled to a $500,000 charitable deduction. However, the amount deductible would be limited to 30&nbsp;percent of his adjusted gross income.</blockquote><br /> If any portion of a gift of long-term capital gain property to a public charity is disallowed as a result of the adjusted gross income ceiling, the taxpayer may carry the deduction over for five years subject to the same 30&nbsp;percent ceiling.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> In lieu of a full fair market value contribution of property subject to the 30&nbsp;percent ceiling, a taxpayer may elect to take a lesser contribution of the property&rsquo;s basis subject to the 50 (or 60)&nbsp;percent ceiling. Once made, such an election applies to all contributions of capital gain property during the taxable year (except unrelated use gifts of appreciated tangible personal property, as explained below).&nbsp;The election is generally irrevocable for the year in which it is made.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <blockquote><em>Example:</em> Asher owns raw land he purchased five years ago for $100,000.&nbsp;The fair market value of the land is $500,000. If Asher were to sell the land, he would recognize $400,000 long-term capital gain. Because the land is long-term capital gain property, if Asher contributes the land to a public charity, he would be entitled to a $500,000 charitable deduction. However, if Asher elects to limit his charitable deduction to $100,000 (the land&rsquo;s basis), the amount deductible would be 50 (or 60)&nbsp;percent of his adjusted gross income.</blockquote><br /> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8546">8546</a> for the rules regarding contribution of property to private foundations.<br /> <br /> <em>Tangible Personal Property</em>.&nbsp;The treatment of a contribution of appreciated tangible personal property (i.e., property which, if sold, would generate long-term capital gain) depends on whether the use of the property is related or unrelated to the purpose or function of the (public or governmental) organization. If the property is related use property (e.g., a contribution of a painting to a museum), generally the full fair market value is deductible, subject to the 30&nbsp;percent ceiling. However, if the property is unrelated to the purpose or function of the charity, the deduction is generally limited to the donor&rsquo;s adjusted basis.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> <em>Other Gifts of Property</em>.&nbsp;The deduction for any charitable contribution of property is reduced by the amount of gain that would <em>not</em> be long-term capital gain if the property were sold at its fair market value at the time of the contribution.<a href="#_ftn7" name="_ftnref7">⁷</a> In other words, the amount of such gifts are limited to the basis in the property.<br /> <br /> In the case of a gift of S corporation stock, special rules (similar to those relating to the treatment of unrealized receivables and inventory items under IRC Section&nbsp;751) apply in determining whether gain on such stock is long-term capital gain for purposes of determining the amount of a charitable contribution.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&nbsp;170(b)(1)(G)(i).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; IRC &sect;&nbsp;170(b)(1)(C).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1222(3).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; IRC &sect;&nbsp;170(b)(1)(C)(ii).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp; IRC &sect;&nbsp;170(b)(1)(C)(iii); <em>Woodbury v. Commissioner</em>,&nbsp;TC Memo 1988-272, <em>aff&rsquo;d</em>, 90-1 USTC &para;&nbsp;50,199 (10th Cir. 1990).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp; IRC &sect;&sect;&nbsp;170(e)(1)(B), 170(b)(1)(C);&nbsp;Treas. Reg. &sect;&nbsp;1.170A-4(b).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp; IRC &sect;&nbsp;170(e)(1)(A).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp;&nbsp; IRC &sect;&nbsp;170(e)(1).<br /> <br /> </div></div><br />