Adjusted Annual Income: Understanding the Medical Expense Deduction
One of the biggest challenges for owners and managers when it comes to calculating rent for HUD-assisted sites is determining the appropriate medical deduction for eligible households. Every household spends some of its income on health-related expenses, but not all households and not all expenses qualify to be deducted. We’ll go over HUD rules regarding the medical expense deduction. We’ll discuss whose medical expenses may be deducted, along with what types of costs are also considered eligible.
Medical Expense Deduction Basics
A deduction for unreimbursed medical expenses is one of five possible deductions that HUD allows to be subtracted from annual income based on allowable family expenses and family characteristics [HUD Handbook 4350.3, par. 5-9(A)]. The remainder, after these deductions are subtracted, is called adjusted income. And this amount after the permitted deductions is generally the amount upon which rent is based.
Elderly or disabled families. The medical expense deduction is permitted only for families in which the head, spouse, or co-head is at least 62 years old or is a person with disabilities [HUD Handbook, par. 5-10(D)(1)].
Include all unreimbursed expenses. If the household is eligible for a medical expense deduction, owners must include the unreimbursed medical expenses of all household members, including the expenses of nonelderly adults or children living in the family. In other words, although medical expenses are permitted only for elderly or disabled households, once a household qualifies as an elderly or disabled household, the medical expenses of all household members are considered.
For example, if a household includes a 70-year-old grandfather (head), a 37-year-old daughter, and a 4-year-old grandson, the medical expenses of all three family members would be considered when calculating the medical expense deduction.
Medical expenses include all expenses the family anticipates to incur during the 12 months following certification or recertification that are not reimbursed by an outside source, such as insurance.
Also, an owner may use the ongoing expenses the family paid in the 12 months preceding the certification/recertification to estimate anticipated medical expenses [HUD Handbook, par. 5-10(D)(2-4)]. Examples of anticipated medical expenses include prescription drugs, eyeglasses, unpaid doctor and hospital bills that include a payment plan, insurance premiums, Medicare Part D premiums, hearing aids, dental care, transportation/mileage to health care appointments, etc.
One-time, nonrecurring medical expenses. It’s important to note that HUD allows past one-time nonrecurring medical expenses that have been paid in full to be included in the calculation of the medical expense deduction for current tenants at an initial, interim, or annual recertification. However, past one-time nonrecurring medical expenses that have been paid in full are not applicable when calculating anticipated medical expenses at move-in. But if the nonrecurring medical expense at move-in hasn’t been paid in full and the tenant is under a payment plan, the expense would be counted as anticipated [HUD Handbook 4350.3, par. 5-10(D)(6)].
In other words, when a household is making regular payments over time on a bill for a past one-time medical expense, those payments are included in anticipated medical expenses. But if a household has received a deduction for the full amount of a medical bill it’s paying over time, the household can’t continue to count that bill even if the bill hasn’t yet been paid [HUD Handbook 4350.3, par. 5-10(D)(7)].
For example, suppose a household didn’t have insurance to cover a household member’s operation four years ago. They have been paying $105 a month toward the $5,040 debt. Each year that amount ($105 x 12 months or $1,260) has been included in their total medical expenses. A review of their file indicates that a total of $5,040 has been added to total medical expenses over the four-year period. However, the household brings a current invoice to their annual recertification interview. And over the four-year period they have missed five payments and still owe $525. Although they still owe this amount, the bill can’t be included in their current medical expenses because the expense has already been deducted.
3 percent rule. Eligible households may deduct medical expenses in excess of 3 percent of their annual gross income [HUD Handbook 4350.3, par. 5-10(D)(5)]. For example, to calculate the medical expense deduction, suppose the head of household is 64 years old, making the household eligible for a medical expense deduction. The household’s annual income is $12,000 and total medical expenses come out to $1,500. Three percent of the household’s annual income of $12,000 is $360. Therefore, the portion of total medical expenses that exceeds $360 is $1,140 ($1,500 - $360).
Examples of Deductible vs. Nondeductible Medical Expenses
Here are the most common examples of eligible and ineligible items for medical expense deductions. The following lists are not exhaustive but cover most scenarios related to medical expense deductions.
Deductible Medical Expenses
- Services of recognized health care professionals. This includes services of physicians, nurses, dentists, opticians, mental health practitioners, osteopaths, chiropractors, Christian Science practitioners, and acupuncture practitioners;
- Services of health care facilities, laboratory fees, x-rays, diagnostic tests, blood, and oxygen. These may include hospitals, health maintenance organization (HMOs), laser eye surgery, outpatient medical facilities, and clinic fees;
- Alcoholism and drug addiction treatment;
- Medical insurance premiums, including expenses paid to an HMO, Medicaid insurance payments that haven’t be reimbursed, and long-term care premiums (not prorated).
- Prescription and non-prescription medicines. Aspirin and antihistamine may be deducted only if prescribed by a physician for a specific medical condition;
- Transportation to and from treatment and lodging based on actual cost (e.g., bus fare) or, if driving a car, a mileage rate based on IRS rules (currently 22 cents per mile).
- Medical care cost of permanently institutionalized family members if their income is included in annual income;
- Dental treatments such as fees paid to a dentist, x-rays, fillings, braces, extractions, and dentures;
- Eyeglasses, contact lenses;
- Hearing aid and batteries, wheelchair, walker, artificial limbs, Braille books and magazines, and oxygen and oxygen equipment. This includes the purchase and upkeep of the equipment such as additional utility costs to the tenant because of an oxygen machine (for sites with tenant-paid utilities only);
- Attendant care or periodic medical care such as nursing services; assistance animal and its upkeep;
- Payments on accumulated medical bills (scheduled payments only).
Nondeductible Medical Expenses
- Unnecessary cosmetic surgery. This applies to any procedure that’s directed at improving the patient’s appearance and doesn’t meaningfully promote the proper function of the body or prevent or treat illness or disease. Procedures such as face-lifts, hair transplants, hair removal (electrolysis), and liposuction generally aren’t deductible. However, if medical complications, such as infections, occur as a result of the procedure and require medical treatment, the medical treatment expenses would be treated as a medical expense deduction. Amounts paid for cosmetic surgery may be deducted if necessary to improve a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or a disfiguring disease;
- Health club dues, such as membership in any club organized for business, pleasure, recreation, or other social purpose, such as YMCA dues, or amounts paid for steam baths for general health or to relieve physical or mental discomfort not related to a particular medical condition.
- Household help expenses, even if such help is recommended by a doctor. However, persons providing nursing-type services may be deducted. Also, certain maintenance or personal care services provided for long-term care may be deducted.
- Medical savings account (MSA), such as an Archer MSA.
- Nutritional supplements, vitamins, herbal supplements, and natural medicines. However, these may be deducted if they are recommended in writing by a medical practitioner licensed in the locality where practicing. These items must be recommended as treatment for a specific medical condition diagnosed by a physician or other health care provider licensed to make a diagnosis in the locality where practicing. Otherwise, these items are taken to maintain ordinary good health and are not for medical care.
- Personal use items. Items ordinarily used for personal, living, or family purposes may not be deducted, unless the item is used primarily to prevent or alleviate a physical or mental defect or illness. For example, the cost of a wig purchased upon the advice of a physician for the mental health of a patient who has lost all of his or her hair from disease or incontinence supplies can be included with medical expenses.
- Non-prescription medicines. These are not included in medical expenses unless they’re recommended in writing by a licensed medical professional in the locality where practicing. The items must be recommended as treatment for a specific medical condition diagnosed by a physician or other health care provider licensed to make a diagnosis.