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