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  • Howard J. Kass, CPA
    Howard J. Kass, CPA
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    The Celiac Tax Deduction: What's New?

    Caption: Photo: CC - 401K

    Celiac.com 03/05/2012 - When I first wrote about the tax treatments available to diagnosed Celiacs for the additional costs they incur by following a Gluten-Free diet fifteen years ago, the law was pretty well established and there were no significant changes in the works. The advent of Section 125 plans shortly thereafter, also known as Flexible Spending Arrangements (FSA) added a new twist to the quest for tax deductions. With all the hoopla that has taken place in the last year, both with health care reform and tax legislation, what has changed?

    Photo: CC - 401KOverview of the Medical Expense Deduction
    Before I talk about what has changed, it is important to review the basics of the medical expense deduction and how it relates to the additional costs of following a Gluten-Free diet. Section 213 of the Internal Revenue Code (IRC) provides an itemized deduction for qualified medical expenses incurred. Under present law, medical expenses are deductible to the extent that they exceed 7.5% of Adjusted Gross Income (AGI). AGI is the number shown on the last line of the first page of form 1040.

    So, for an individual who has an AGI of $100,000, the “floor” they have to exceed is $7,500 before any of their medical expenses begin to be deductible. If one is in relatively good health and if their employer pays for their health insurance, it is unlikely that one would have enough qualified medical expenses to take the deduction.

    The Gluten-Free Component
    Now, let’s bring the cost of Gluten-Free food into the equation. Based on a variety of Revenue Rulings and court cases, sufficient precedent has been established for one who has been diagnosed with Celiac Disease (or any other medical condition requiring adherence to a Gluten-Free diet) to claim a medical deduction for the additional costs of following a Gluten-Free diet. I will cite the applicable law at the end of this article.

    So, how does one calculate the cost of following the Gluten-Free diet and, equally important, how does one document those costs? Calculating the cost of following the diet is a matter of tracking the costs of purchasing food items that are necessary to the diet and subtracting the costs of comparable non-Gluten-Free versions of the same food. So, for example, if a loaf of Gluten-Free bread costs you $6.00 and a comparable loaf of “regular” bread costs $2.00, the deductible cost of the Gluten-Free bread would be $4.00.

    What about those items for which there is no counterpart in the non-Gluten-Free community? One example of this would be Xantham Gum. In that event, the total cost of the product would be deductible.

    It’s easy to discuss this process on an item by item basis, but how does one accumulate this data and perform the calculations for a year? First, it is important to collect and retain detailed receipts of every purchase you wish to deduct. You would then need to create a spreadsheet on which to track this data for the year. While I recommend the use of an electronic spreadsheet, pencil and paper will also serve the purpose. If cost is what stands in your way of using a product like Microsoft Excel, check out OpenOffice.org. It is a free Microsoft compatible office suite that should serve your purposes quite well. I would strongly encourage you to collect this data and update your spreadsheet after each shopping trip.

    Where do Flexible Spending Arrangements Come In?
    As mentioned earlier, depending on the amount of your AGI, you may still not have accumulated enough in deductible medical expenses to be able to take the deduction. However, under current law, if you participate in a Section 125 plan with an FSA and, if your FSA plan allows it, you may be able to reimburse yourself for the additional costs of following a Gluten-Free diet. If you can do that, you have effectively achieved an “above the line” deduction for following the Gluten-Free diet. Similarly, since Health Savings Accounts (HSAs) follow the same rules as FSAs, that may also provide you with an opportunity to get your medical deductions, including the additional costs of observing a Gluten-free diet above the line. For those who are unfamiliar with HSAs, they are only available to those who use them in conjunction with a high-deductible health insurance plan. See your tax advisor for more information or e-mail me with your questions.

    Getting back to the discussion on FSAs, however, before you rejoice, there are a couple of caveats to be aware of. First, your 125 plan has to permit this reimbursement. You will need to check with your plan administrator and, perhaps, read the plan document yourself. Be prepared to educate the plan administrator on this issue. Also, after you read the effect that Health Care Reform is going to have on health care expenses in FSAs, you may determine that it isn’t worth the effort. More on that later.

    So, What’s Changed?
    Two significant changes that will affect one’s ability to deduct the costs of following a Gluten-Free diet are slated to occur in the name of Health Care Reform.

    First, the floor for deducting medical expenses is scheduled to increase from 7.5% of AGI to 10% beginning in 2013. If you or your spouse will be age 65 or over at that time, the increase to 10% will take place in 2017. Going back to our example from before, if one has an AGI of $100,000, instead of medical expenses having to exceed a floor of $7,500 to be deductible, they would have to exceed $10,000. This increase would obviously make one think twice about accumulating all the data described earlier!

    Another change slated to take place in 2013 would affect the strategy of paying for the costs of following a Gluten-Free diet from an FSA. Beginning in 2013, the maximum amount that could be contributed to a health FSA will be limited to $2,500. There is currently no limit! This cap will reduce the value of paying the costs of following a Gluten-Free diet because doing so will limit the amount available to pay for other health related expenses. Since HSAs are less restrictive, there may be an opportunity here to improve your deduction options.

    So, What’s the Bottom Line?
    Until the end of 2012, as the law currently stands, it is business as usual in terms of how (if at all) you have been deducting your costs of following a Gluten-Free diet. You must have a diagnosis that requires you to follow a Gluten-Free diet and your costs are potentially deductible as an itemized deduction to the extent they exceed 7.5% of your AGI. If you participate in an FSA, you may be able to pay those expenses through your plan. Check with your plan administrator.

    Beginning in 2013, however, the landscape changes. You will have a higher hurdle to overcome to take the itemized deduction and you will be subject to new restrictions in the amounts that can be paid through an FSA. That’s all true as of this writing. As you must certainly be aware, Health Care is a very volatile issue in Washington right now and there are many who believe that it will look very different than it does right now, by the time 2013 rolls around. Congress isn’t done tinkering yet – stay tuned.

    Cites to the Law

    For those who want to learn more, here are some of the more relevant cites to the tax law:

    • §213 of the Internal Revenue Code
    • Rev Rul 55-261
    • Rev Rul 76-80
    • Cohen v. Commissioner, 38 TC 387
    • Randolph v. Commissioner, 67 TC 481
    • Fleming, TC MEMO 1980 583
    • Van Kelb, TC MEMO 1978 366
    • §9013(a)-(B) of the Patient Protection and Affordable Care Act, P.L. 111-148, 3/23/2010
    • §125(i)(1) of the Internal Revenue Code as amended by 2010 Health Care Act §10902(a)

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    Wow, fail. I eat mostly rice. Why should my tax dollars go to supporting those who have made the personal choice to eat expensive gluten substitutes?

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    Inasmuch as the FDA permits 20ppm of gluten to be in products labeled "Gluten-free" (enough to make these products completely inedible for at least me as a Celiac) and the counterpart to eating zero-gluten fresh produce is zero-gluten fresh produce; one has to wonder why bother with government at all!

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    Wow, fail. I eat mostly rice. Why should my tax dollars go to supporting those who have made the personal choice to eat expensive gluten substitutes?

    It is very difficult to get all your nutrients from rice alone. Quinoa, teff and other expensive grains provide many more nutrients than rice. By eating a healthier diet (although more expensive) I believe I'm contributing to health care by staying well.

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    Wow, fail. I eat mostly rice. Why should my tax dollars go to supporting those who have made the personal choice to eat expensive gluten substitutes?

    I am a gluten intolerant Enrolled Agent (tax preparer). This article does an excellent job of explaining how to claim any medical expenses related to a medically prescribed gluten free diet. Although an individual may be perfectly happy eating only rice, it sometimes is not a palatable option for children and teenagers who see all their friends eating sandwiches at school and want to have a sandwich as well. Or someone who has to bring food to work and wants to not be noticed for eating "differently". Gluten is often present in every day items and condiments - not just bread and cookies.

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    Thank you for the update. Sounds like a challenge. I'm 8 years diagnosed now and it hits the wallet! I get frustrated when I see bread on sale for 85 cents and I'm paying $6.00 I'll save my receipts document comparison non-gluten free products cost by taken pictures with cell phone. Then enter them in the spreadsheet. Thank you.

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    I'd appreciate this tax deduction but my gluten-free expenses don't exceed the allowed amount. And eating mostly rice is not a well balanced diet. What about those people who have children with Celiac disease. Do you, Katherine, think that they should tell their kids they can only eat rice?

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    Guest Brooke Follett

    Posted

    I think the percentage should be lowered. Gluten free food is pricey. However, I try to stick to the foods that are gluten free naturally. It's nice to be able to have the option to have those substitutes.

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    I'm SOOO confused! The article states that the cost difference for following a gluten-free diet is deductible, but NONE of the "relevant cites to the tax law" that are listed seem to support this statement, as far as I can find.

     

    §213 of the Internal Revenue Code lists "Special foods and beverages" under NON-deductible medical expenses (obtained here-www (dot) usu (dot) edu (slash) hr (slash) files (slash) uploads (slash) 213(d)eligiblemedicalexpenses (dot) pdf )

     

    Rev Rul 55-261, found at www (dot) irs.gov (slash) pub (slash) irs-wd (slash) 0941003 (dot) pdf , states, "when that special food or beverage is taken as a substitute for food or beverage normally consumed by a person to satisfy normal nutritional requirements, the expense is personal and is not deductible as a medical expense." (page 2, paragraph 3)

     

    The document I found when I googled "Randolph v. Commissioner, 67 TC 481" ( www (dot) ustaxcourt (dot) gov (slash) InOpHistoric (slash) MASSA (dot) TCM (dot) WPD (dot) pdf ) states that the court was "not convinced that his special diet, although followed for medical reasons, differed from the diet of an ordinarily health-conscious individual." (page 6, paragraph 2)

     

    A few of the other citations seemed to have little (if anything) to do with the subject of tax deductions for foods related to medically necessary diets.

     

    The single most useful document I was able to find wasn't even listed in the recommended cites!

     

    There is a response letter from the Office of the Chief Council of the IRS: www (dot) irs (dot) gov (slash) pub (slash) irs-wd (slash) 11-0035(dot) pdf

    which states, "A taxpayer who can establish the medical purpose of the diet may deduct the excess cost if the taxpayer can prove what the taxpayer spent for the special diet and what the taxpayer would spend for food to satisfy normal nutritional needs."

     

    Why does the author reference rulings that are counter to his point, and fail to reference anything that supports it???

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    Are books about gluten-free cooking tax deductible? What about books about celiac disease or gluten intolerance? And thank you for this article -- I had no idea the food was deductible.

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    Wow, fail. I eat mostly rice. Why should my tax dollars go to supporting those who have made the personal choice to eat expensive gluten substitutes?

    For most people it's not a choice to go gluten-free. It affects people's lives in ways you probably don't know, so you should do some research and understand the reason why people have to eat gluten-free before you say anything! Many people have severe health issues when they eat gluten and why should they have to suffer and pay more money for the same product you can get for a third of the cost. It's not my choice to go gluten-free, this is a great tax deduction for someone like me who can barely afford the normal price of food these days. Now I have to pay $7 for a loaf of bread compared to $2, why shouldn't I get a tax deduction for this?

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  • About Me

    Howard J. Kass is a partner at Zinner & Co. LLP, and has over 30 years experience and has cultivated particular expertise in individual and business income taxes, tax aspects of real estate investment, gift and estate taxes and tax exempt organizations. Howard applies his extensive knowledge and experience to a diverse client base of individuals and companies including closely held businesses in a variety of industries and ownership structures such as C Corporations, S Corporations, Partnerships, and LLCs. Industries served include real estate, manufacturing, retail establishments, insurance agencies, distributors and service companies.

  • Related Articles

    Scott Adams
    The following guidelines were received from the Oct. 1993 CSA/USA National Conference in Buffalo, NY:
    1) You can claim only the EXTRA COST of the gluten-free product over what you would pay for the similar item at a grocery store. For example, if wheat flour costs $0.89 per 5 lbs. and rice flour is $3.25 per 5 lbs., the DIFFERENCE of $2.36 is tax deductible. You may also claim mileage expense for the extra trip to the health food store and postal costs on gluten-free products ordered by mail.
    2) The cost of xanthan gum (methylcellulose, etc.) used in gluten-free home baked goods is completely different than anything used in an ordinary recipe, so in the opinion of the IRS, the total cost of this item can be claimed.
    3) Save all cash register tapes, receipts, and canceled checks to substantiate your gluten-free purchases. You will need to prepare a list of grocery store prices to arrive at the differences in costs. You need not submit it with your return, but do retain it.
    4) Attach a letter from your doctor to your tax return. This letter should state that you have Celiac Sprue disease and must adhere to a total gluten-free diet for life.
    5) Under MEDICAL DEDUCTIONS list as Extra cost of a gluten-free diet the total amount of your extra expenses. You do not need to itemize these expenses.
    Suggestions:
    1) You may want to write the Citations (as given below) on your tax return. Always keep a copy of your doctors letter for your own records.
    2) Your IRS office may refer you to Publication 17 and tell you these deductions are not permissible. IRS representatives have ruled otherwise and this is applicable throughout the US Refer them to the following Citations:
    Revenue Ruling 55-261 Cohen 38 TC 387 Revenue Ruling 76-80, 67 TC 481 Flemming TC MEMO 1980 583 Van Kalb TC MEMO 1978 366

    Howard J. Kass, CPA
    This is a good summary of the proper tax treatment for the additional costs of complying with a gluten-free diet, under a doctors direction. Let me offer a couple of points of clarification and amplification.
    Revenue Ruling 76-80 is more on point in that it specifically discusses the deductibility of the additional costs one incurs in purchasing a special form of a product versus the normal cost of the non-special version.
    Additionally, if one has to purchase items that they would not otherwise purchase if not for the underlying medical condition (such as xanthan gum) then the full cost of such items are deductible.
    It is important to point out that one of the requirements for deducting a medical expense is that the expenditure must be incurred to treat or alleviate a specific medical condition. It is necessary, then, to establish to the IRS that such a medical condition exists. This is best done by a letter of verification from your doctor. This requirement obviously places a celiac in the position of having to obtain a medical diagnosis in order to deduct the additional costs of following a gluten-free diet.
    As far as the mechanics of the deduction are concerned, you must first establish the amount of your excess costs associated with the gluten-free diet. This is done by maintaining detailed records of your purchases, as well as maintaining records of comparable normal products, accumulating those costs and subtracting the costs of the normal versions of those products over the tax year in question. The deduction would then be taken as a medical deduction on schedule A of form 1040. To obtain the benefit of the deduction, then, you must first be able to itemize deductions, and you must have enough non-reimbursed medical expenses to exceed the threshold of 7.5% of your Adjusted Gross Income. The amount by which your aggregate medical expenses, including the additional cost of a gluten-free diet, exceed that threshold amount would be deductible.
    Does anyone have any experiences or rulings on the legality of deducting as a medical expense the costs for attending a CSA/USA seminar?
    IRS publication 502 (Medical and Dental expense handbook) does not give any specific examples for seminars, but they do ok the cost of special schools for medical or physical reasons. I can rationalize the cost of a Celiac seminar as a medical education expense.
    According to Internal Revenue Code Section 213, travel expenses that may be deducted are those primarily for and essential to medical care . . .
    Regulation 1.213-1(e)(1)(i) defines medical care as the diagnosis, cure, mitigation, treatment, or prevention of disease.
    Depending upon how aggressive or conservative one wishes to be, one could interpret this to mean that meetings that educate individuals in the prevention of a disease are expenses incurred in the mitigation or prevention of disease. All of the case law that I saw dealt with travel to warmer climates, not to medical meetings and conventions.
    Some practitioners might be inclined to take a somewhat aggressive approach and play the audit lottery, while advising their clients that there is risk in taking the deduction. Before taking a deduction, however, it is only prudent to consult with your tax advisor.
    Obviously, this discussion only pertains to taxpayers in the United States.
    I understand that this can be quite confusing. My best advice is to contact your tax advisor. I would be willing to answer questions of a general nature. If I dont answer immediately, please be patient. You can E-mail me at: hkass@zinnerco.com.
    I do have the full text of the two Rev. Rulings mentioned above, as well as the two court cases, but the files are large (about 20K each) and I am unsure of what the copyright law allows as far as distributing this information. The materials are copyrighted.
    Hope this helps clarify (rather than confuse) some of the tax issues.

    Scott Adams
    This article appeared in the Autumn 2004 edition of Celiac.coms Scott-Free Newsletter. It originally appeared in the book A Personal Touch On...™ Celiac Disease. ©A Personal Touch Publishing, LLC.
    Celiac.com 10/27/2004 - For at least the last 15 years I have gone to several doctors with a host of various gastrointestinal disorders. The most common diagnosis I received was Irritable Bowel Syndrome. Finally, in May of 2003, I found a doctor who was thorough enough to check for Celiac Disease. I have been on the gluten-free diet ever since and feel wonderful!
    When first diagnosed with Celiac Disease, I suppose I was like most people—overwhelmed by the magnitude of the lifestyle change associated with the gluten-free diet. Once reality set in and I began to accept and deal with this new diet, I experienced another overwhelming feeling—the high cost of gluten-free foods! While I was not on a tight budget, the idea of spending four times as much for a loaf of bread that was only half the size was daunting to say the least. I immediately began searching for ways to diminish this extra expense.
    My research took me to the Internet, where I discovered that according to several IRS rulings (Revenue Ruling 55-261; Revenue Ruling 76-80, 67 TC 481; Cohen 38 TC 37; Van Kalb TC MEMO 1978 366; Flemming TC MEMO 1980 583), the cost difference between gluten containing food products and specialty gluten-free alternatives is tax deductible for Celiac patients. However, it didnt turn out to be that simple.
    Further research revealed that only the portion which exceeds a 7.5% threshold of adjusted gross income for all medical expenses combined would be deductible. In English, that meant that if I had an income of $50,000, I would only be able to deduct my extra expense of gluten-free foods (and any other legally deductible medical expense) that exceeded $3,750 (7.5% of $50,000)! Well, gluten-free foods are not that expensive!
    Knowing I would never reach that deductibility threshold, my search continued. Suddenly, a rare epiphany befell me. Since the IRS had ruled specialty foods that are medically necessary to treat a condition are deductible, it may follow that these same expenses may be reimbursable through my employers Flexible Spending Account program.
    Basically, the Flexible Spending Account is a plan that allows you, the employee, to set up a separate savings account, usually administered by a third party. You decide at the beginning of the year how much to contribute to this account. The contributions are deducted from your payroll before tax (meaning you are not charged income tax on the portion of your income you put into the account). As you have out of pocket medical expenses, you file a claim from the Flexible Spending Account administrator for reimbursement of those expenses. Once the account is emptied, no further reimbursements are possible for that year. One caveat with these plans is that they are "use it or lose it," which means that if you do not have sufficient medical expenses equal to the amount contributed you will forfeit any unclaimed balance. Your human resources department should be able to tell you if your company offers a Flexible Spending Account.
    In my case, I first called the human resources department at my place of employment to find out if indeed my rationale was valid. The response was "I dont know, but I doubt it"! Never one to take no for an answer (especially when preceded by "I dont know"!), I pressed on. A phone call to the Flexible Spending Account administration company yielded the answer I had hoped for—YES!
    Fortunately, I happened to connect with a customer service representative who was extremely thorough and diligent. She had to put me on hold several times, but she finally found not only the answer I was looking for, but also the proper procedure for filing a claim. She sent me a worksheet that I now use to file any claim for gluten-free foods. The sheet has a place to list the food item, cost of the gluten-free variety, cost of the gluten-containing variety, and the price difference. I made several copies of the worksheet, so now whenever I file a claim, I just fill out a new sheet. The receipts for the food items I am requesting reimbursement for must be included each time with the worksheet. With my first claim, I also had to provide a letter from my doctor clearly stating I was diagnosed with celiac disease and that I must be on a gluten-free diet. They keep this letter on file, so I do not have to send it each time.
    Generally speaking, any medical expense the IRS considers deductible (on Schedule A of your 1040 form) is reimbursable, however, employers are not obligated to follow those guidelines. They are not able to add other expenses that are not deductible, but they can delete certain ones (like gluten-free foods) if they choose. So it behooves you to check with your Flexible Spending Account administrator to find out what your plan covers and the proper procedure for reimbursement. It may be necessary to ask to speak to a supervisor, since not every customer service representative will be as helpful as the one I had. You may wish to cite the IRS rulings I listed earlier to convince them to accept this as a reimbursable item. This can also be helpful to convince them to reimburse gluten-free food items if they do not currently do so.
    While it is still your money that is paying for the entire cost of gluten-free food, using the Flexible Spending Account to switch that money to the tax free variety can add up to significant savings. Depending on the amount of gluten-free food you are buying, and your tax bracket, it can easily be over $100 per year in tax savings!

    Jefferson Adams
    Celiac.com 03/21/2014 - According to the National Foundation for Celiac Awareness, the burden of celiac disease can cost an extra $1,000 to $2,500 per year. However, many people who eat gluten-free diets as treatment for celiac disease or other medical conditions are eligible for tax breaks.
    Those who do eat gluten-free due to medical conditions will be happy to learn that both the Internal Revenue Service and the Canada Revenue Agency list gluten-free food as an eligible medical expense. That means that filers may be eligible for tax relief for gluten-free-related food expenses.
    For example, according to the Canada Revenue Agency website, celiac disease suffers are "entitled to claim the incremental costs associated with the purchase of gluten-free products as a medical expense." That means Canadians with celiac disease can claim the difference between the cost of their gluten-free food and the cost of comparable regular food. However, there are a few hoops to jump through. To claim the credit, Canadian taxpayers need a doctor's letter confirming celiac disease; a receipt for every item claimed; and a summary for each item calculating the cost differential for gluten-free products.
    U.S. residents can deduct the extra cost for gluten-free foods and goods purchased to meet celiac dietary needs. Shipping and delivery costs for those gluten-free products can also be deducted. Also, for any special trip to purchase gluten-free foods, the cost of transportation to and from the store is deductible, including mileage, tolls and parking fees. The vehicle deduction for trips during 2013 is 24 cents per mile.
    To claim these deductions, taxpayers first need an official, written celiac diagnosis from a doctor. A copy of this diagnosis must be submitted with other completed tax forms.
    Taxpayers will then complete form 1040 schedule A for medical deductions. For reference taxpayers may cite: IRS Publication 502; Revenue Rulings: 55-261, 76-80, 2002-19 and 67 TC 481; Cohen 38 TC 387; Flemming TC MEMO 1980 583; and Van Kalb TC MEMO 1978 366
    This must be supported with copies of receipts for all gluten-free purchases, along with lists of prices for gluten-free food and regular counterparts being claimed.
    The difference between those prices is tax-deductible. For example, if a pound of wheat flour costs $0.60 and a pound of rice flour costs $3.40, then you may deduct $2.80 for each pound of rice flour you are claiming for that tax year.
    Remember, some specialty products like xanthan gum and sorghum flour are fully tax-deductible as they have no "regular" counterpart but are purchased to meet your dietary needs.
    Of course, for specific advice, contact an accountant.
    Sources:
    CAFinance.com CeliacCentral.org
    Celiac.com.

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