Ordinarily, you can't deduct the cost of permanent improvements to your home, such as a swimming pool or a new bathroom. But some home improvements can be deductible as a medical expense. Before you get excited about deducting your new pool, be aware that there are significant hurdles to taking this deduction.
Home improvements can be deductible as a medical expense if their main purpose is medical care for you, your spouse, or your dependents. These expenses are fully deductible subject to the limits discussed below if they don't increase the value of your home. Examples of such fully deductible expenses are improvements to make your home wheelchair accessible or to make it easier for a disabled person to get around the home, including:
However, some improvements increase the value of your home—for example, installing an elevator so that a disabled person doesn't have to use stairs, or installing a new bathroom on the ground floor of your home to avoid having to use stairs. For these types of improvements, you must reduce the amount of your deduction by the increase in the value of your home.
It can even be possible to deduct the cost of adding a swimming pool to your home. However, the use of the pool must be prescribed by a doctor as medical treatment or physical therapy. Thus, for example, you can't deduct the cost of a pool because swimming is good exercise. Moreover, the IRS may question the deduction unless the pool is specially designed for medical treatment. For example, the IRS permitted a deduction by an osteoarthritis patient whose doctor prescribed swimming several times a day as treatment. He built a special indoor lap pool with specially designed stairs and a hydrotherapy device.
You can also deduct amounts you pay for the operation and upkeep of an improvement, as long as the main reason for them is medical care. This rule applies even if none or only part of the original cost of the capital asset qualified as a medical care expense.
However, there are two tax rules that work together to limit or eliminate entirely your medical expense deduction for home improvements:
First, you can deduct home improvements as medical expenses only if you itemize your personal deductions instead of taking the standard deduction. If you don't itemize, you get no deduction for your medical expenses, including home improvements. Changes brought about by the Tax Cuts and Jobs Act that took effect in 2018 make it far more difficult for most taxpayers to itemize than in the past.
You should itemize only if all your deductible personal expenses exceed the standard deduction. The TCJA almost doubled the standard deduction to over $12,000 for single taxpayers and nearly $25,000 for married couples filing jointly (as almost all do). This means you have to have a lot of personal deductions to itemize. However, the TCJA limited or eliminated personal expenses that used to be deductible. Only the following personal expenses may be deducted by itemizers:
In the past, about 30% of all taxpayers itemized their personal deductions. As a result of the TCJA's changes, only about 10% of taxpayers are able to itemize today.
However, you could fall within the 10% who itemize if your deductible home improvement expenses are substantial and/or you have many other personal deductions such as charitable contributions and home mortgage interest.
The other major impediment to deducting home improvements as medical expenses is that you can't deduct the full cost of such expenses, even if you itemize. You can deduct only the amount they and all your other deductible medical expenses exceed 7.5% of your adjusted gross income (AGI). Your AGI is your total taxable income, minus deductions for retirement contributions and one-half of your self-employment taxes (if any), plus a few other items (as shown at the bottom of your Form 1040).
Thus, for example, if your AGI is $100,000, you can deduct your home improvements and other medical expenses as an itemized deduction only to the extent they exceed $7,500. If you have $10,000 in total medical expenses, you can deduct only $2,500. You would add the $2,500 to your other deductible personal expenses and, if they total more than the standard deduction, you would deduct them as an itemized deduction. On the other hand, if you have a $100,000 AGI and your medical expenses are less than $7,500, you would not be able to deduct them at all.
Be sure to keep track of all the medical-related expenses you pay during the year in addition to home improvements because they could add up. Such expenses include out-of-pocket payments for prescription drugs, dental care, chiropractic care, eye exams and glasses or contacts, medical insurance, Medicare payments, deductibles, and co-pays. You can find an exhaustive list of deductible home expenses in IRS Publication 502, Medical and Dental Expenses.
Because of the AGI threshold on deducting home improvements as a medical expense, it's advisable to bunch such expenses together into a single year. For example, if you want to install exit ramps and a stairway lift in your home, have all the work done in a single year. This will give you as large a deduction as possible for that year. You should follow this strategy for your other deductible personal expenses as well, such as charitable contributions.