Case Study: A Surprising Medical Deduction

Today, I want to show an example of an unusual even that had a very large tax impact. While this specific example is very rare, the principles behind the story apply to most of our clients. Every few decades there is always something really big that comes around that you never forget. Everyone has a few of those years in their lifetime. I bet you never thought about the tax implications of those high impact years.

At Molen & Associates (est. 1980) we’ve prepared over 25,000 tax returns in just the last ten years. I personally have prepared thousands of tax returns in that span of time and I’ve seen some very unusual things. In this post I’d like to share with you one particular case that required in depth research of not just the law, but also court cases and other precedent.

The Case

One day I received a call from a long-time client – we’ll call them the Smith family. They had a daughter with severe cerebral palsy and had just met with her doctor for a routine check-up. The doctor noticed that she had begun to increase her motor skills in some small, but surprising ways. He advised the Smiths that they should provide their daughter with a handicap accessible pool to help further stimulate these motor skills.

Medically Necessary

Mr. Smith then made one of the best financial decisions he would make that year, he called me. He asked if there could be any tax deduction for building a handicap accessible pool in his backyard. I gave him some general advice but also told him that I would need to spend some time researching the specifics. In the meantime, per my advice, he contacted the doctor and had him write what was essentially a prescription for the handicap accessible pool. This was a crucial piece of this case; we needed the doctor to determine that this pool activity was medically necessary.

Research

While Mr. Smith was working with the doctor, I was researching court cases to find precedent for the deduction. What I found was very unique and a little unusual. I called Mr. Smith to get the specific details and to explain what we could use and how. What we needed to do was have the home professionally appraised before the construction of the pool began, and then have it appraised again immediately after it was finished. The increase in Fair Market Value (FMV) of the home would have to be taken out of the deduction, as it was considered permanent value added to the home itself. That being said, any Realtor or person who has paid to have a pool built can tell you, what you pay for a pool is not typically recovered when selling your home. A portion of it maybe, but not the full investment. For the Smith’s case, we’d need to remove the portion of the pool that did increase the FMV from their tax deduction.

The Numbers

Let’s take a look at the specifics.

  • Expected cost of the pool: $30,000 (shallow entry, handicap bars, etc.)
  • Home FMV Appraisal before construction: $150,000
  • Home FMV Appraisal after construction: $160,000

The increase in FMV of the home due to the building of the pool is removed from the deduction. The deduction started at $30,000 but then we removed the $10,000 increase in FMV, allowing a deductible portion of $20,000.

One important piece to understanding this specific case study is knowing how medical deductions work. Please click the hyperlink for another post illustrating how and when medical deductions are applicable, as I won’t go in depth here. Suffice it to say, you must exceed 7.5% of your Adjusted Gross Income (AGI) in medical deductions before even a penny of it is ultimately deductible. In this specific case, the Smiths had regular monthly medical expenses due to their daughter’s condition. Those expenses alone exceeded the 7.5% threshold, which meant the full $20,000 was applicable.

Now, to determine how much the pool deduction actually saved them let’s do some math. They have a $20,000 medical deduction and are in a 25% tax bracket. By deducting the $20,000 they remove $20,000 of income from being taxed at that 25% rate. $20,000 x .25 = $5,000. That one single phone call from Mr. Smith saved him $5,000.

Case Closed

The catalyst to all of this was Mr. Smith picking up the phone to talk with his tax professional about a major financial event. I couldn’t possibly have known that this was happening without that call. What could have happened if Mr. Smith didn’t call before he moved forward with the pool? Had he waited to talk with me when he came in to do his taxes for that year, he would not have known that he needed a professional appraisal prior to the building of the pool, which would then mean that he would have lost some or all of the viability of the deduction.

Did you have any major financial events this past year? Will you in the coming years? At Molen & Associates we pride ourselves on our accessibility outside of tax season. Our phones ring constantly as our clients have important, sometimes life-changing, financial events and need real answers to real questions. If you’re looking for a tax professional team to advise you more often than your yearly tax appointment, give us a call at (281) 440-6279 today.

Kevin Molen
Tax Manager

The Molen & Associates Difference

Mike Forsyth

“Super helpful and timely. This is our first year with them and we look forward to trusting them with our taxes and business books for years to come.”

Caitlin Daulong

“Molen & Associates is amazing! They run an incredibly streamlined process, which makes filing taxes a breeze. So impressed with their attention to detail, organization, and swift execution every year. Cannot recommend them enough!”

Sy Sahrai

“I’ve been with Mr. Molen’s company for few years and I felt treated like family respect and dignity. They are caring, professional and honest, which hard to find these days. Love working with them.”

Should I Open an HSA?

Should I Open An HSA Account? Are you considering a Health Savings Account (HSA)? If so, it is vital to understand what exactly an HSA entails. With this guide, you'll learn all about it: the advantages of an HSA and how it can help you manage your medical expenses....

Personal Finance Tips for Young Adults

As someone who has been working for most of their life, I wish there was someone out there who had shown me the correct way to save money for my future. Now that I am in my 30s, I have been getting better at saving money, but there are some personal finance tips that...

How to Track Expenses

There are many different methodologies, tools, tips, and tricks for tracking expenses, and it ultimately depends on your lifestyle and how actively and accurately you want to track them. This is information I’ve pulled from other sources and compiled into a few...

How To Accurately Record Commuting Mileage and Increase Tax Deductions

Increase Tax Deductions With the Business-Mileage Rule Using the Business Mileage tax deduction can be tricky. There are lots of situations that count while others do not. We don’t like commuting mileage. You should dislike it, too. It’s personal. It’s not deductible....

Bookkeeping 101

As a new business owner, you will certainly have some responsibilities you won’t be able to avoid. One of those non-negotiable part of your business is producing financial statements. It can be overwhelming trying to master a topic such as bookkeeping but don’t worry...

Bankruptcy – Everything You Need to Know

Everything you need to know Filing for bankruptcy protection is considered a statement on your ability to repay your debt to your creditors. Filing for bankruptcy will also put a halt to foreclosure or legal actions against you, and it stops creditors from calling and...

Top Tax Tips for 2023

Tax Refunds May Be Smaller This Year Plan now to learn these 2023 tax tips avoid surprises in the future! If you’re expecting a tax refund in 2023, it may be smaller than last year, according to the IRS. Your annual balance is based on taxable income, calculated by...

What is an EA?

Have you ever seen the title EA next to a tax professional’s name and wonder what it means? Or maybe you’re familiar with the title and you’re curious about the differences between an EA and CPA? Either way, in this blog I will be answering these frequently asked...

History of Federal Income Tax Rates: 1913 – 2021

The United States federal government levies taxes on the income of its citizens and legal residents. The Internal Revenue Service (IRS) is the agency responsible for collecting these taxes.  Federal income tax rates have changed several times since 1913, when the...

Familiarize Yourself With Tax Terminology

Yes, I know, tax terminology feels like a whole new language. For most people all of tax forms can be even more confusing than a foreign language. What’s the difference between itemized deduction and standard deduction? What’s Income tax?  These words and more tax...

Request an Appointment Today

10 + 13 =

Call us at

Pin It on Pinterest

Share This