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Medical deduction for schooling

By: Julian Block

The Tax Adviser

The Internal Revenue Code severely limits deductions for medical expenses that are not covered by insurance or otherwise reimbursed. The big hurdle is that Code Section 213 allows write-offs for unreimbursed outlays only to the extent that their total in any one year surpasses 7.5 percent of adjusted gross income. AGI is the amount listed on the last line of page 1 of the 1040 form after all reportable income is offset by certain deductions like alimony payments and contributions to traditional IRAs, but before itemizing for expenditures like real estate taxes and charitable contributions and listing dependency exemptions.

Code Section 213 is fleshed out by densely worded regulations. Among other things, they specify that allowable medical expenses include payments for schooling children with physical or mental handicaps. But they also note that deductibility depends on whether youngsters attend schools that are "special" or are "regular."

How do they determine that schools are special and the expenditures qualify as medical expenses? When the main reason for attending is to use the resources available at the schools or other institutions to prevent or alleviate handicaps. Put another way, it is permissible for schools to provide ordinary education, as long as the learning is "incidental" to the medical care.

Some obvious examples of places that pass muster are schools that teach braille to the blind or lip reading to the deaf or give remedial language training to correct conditions caused by birth defects. More is at stake than just deductions for tuition. The regulations also allow deductions for the cost of meals and lodging at the school, as well as travel expenses.

Regular schooling, though, is another story. An unyielding IRS says you must show some portion of your payment is specifically for medical treatment; otherwise, no deduction for costs incurred at a school without special facilities. It makes no difference that a doctor believes that your handicapped child will benefit from the curriculum, disciplinary methods or other non-medical advantages available at a conventional school.

The agency takes a particularly hard line against allowing any medical deduction for a private school for a child with minor disciplinary problems. It refuses to go along with a deduction unless the child suffers from a "disease" -- a term that, for tax purposes, does not include minor disciplinary problems or adolescent upsets.

Of course, its factual approach is not necessarily the final word in tax disputes. However, its restrictive definition of special schooling is usually upheld by the courts, though, as a general rule, each decision turns on its own set of facts.

Here is a case in point. A New York couple thought themselves entitled to sizable deductions for what they spent to send their son to a boarding school, because they did so on the advice of a psychiatrist who believed that the school's structure and environment would help the boy's psychological problems. Nevertheless, a federal district court agreed with the IRS that the school was regular, because all it provided in return for tuition was a normal education. The court noted that the school did not specialize in problems like the boy's and had no psychiatrist or psychologist on its staff. It mattered not that the educational services were beneficial to the boy's health and well-being.