IRS Publication 502 (Medical and Dental Expenses (for 2021 Returns)); IRS Publication 503 (Child and Dependent Care Expenses (for 2021 Returns))
The IRS has released updated versions of Publications 502 and 503 for the 2021 tax year. Publication 502 describes the medical expenses that are deductible by taxpayers on their 2021 federal income tax returns. Publication 503 explains the requirements that taxpayers must meet to claim the dependent care tax credit (DCTC) under Code § 21 for child and dependent care expenses.
The 2021 version of Publication 502 is substantially similar to its 2020 counterpart. Relevant dollar amounts (e.g., the standard mileage rate for use of an automobile to obtain medical care) have been revised to reflect their 2021 inflation-adjusted values. Clarifications have been added regarding expenses to treat excessive use of alcohol and drugs. Publication 503 has been revised to reflect temporary changes to the DCTC and DCAP rules under the American Rescue Plan Act of 2021 (ARPA) (see our Checkpoint article) and the Consolidated Appropriations Act, 2021 (CAA) (see our Checkpoint article). The 2021 version clarifies that the credit is not available for dependent care payments made to a stepchild or foster child who is under 19 or a dependent, and that the work needed for a dependent care expense to be work-related includes work performed at home. Examples and clarifications have also been added regarding the rules for temporary absences from work, summer day camps, tutoring programs, household services, and the earned income limit for married individuals.
EBIA Comment: Publication 502 provides valuable guidance on what qualifies as a medical expense under Code § 213(d), and thus helps identify the expenses that may be reimbursed or paid by health FSAs, HSAs, or HRAs, or covered on a tax-favored basis under other group health plans (e.g., employer-sponsored medical plans). But Publication 502 should be used with caution in connection with these benefits because it addresses the deductibility of medical expenses—it does not account for differences in the rules for reimbursing expenses under health FSAs, HSAs, or HRAs. Likewise, Publication 503 is written primarily to help taxpayers determine whether expenses qualify for the DCTC. While similar requirements must be met for expenses to be reimbursable under a DCAP, caution is advised when consulting the publication for DCAP purposes because there are some differences. For more information, see EBIA’s Cafeteria Plans manual at Sections XX.D.7 (“Other Guidance Regarding What Is Medical Care: Caution Regarding IRS Publication 502”), XX.D.8 (“Distinguishing Deductibility From Reimbursement of Medical Care Expenses (and Why It Matters)”), XX.M (“Table of Common Expenses, Showing Whether They Are for ‘Medical Care’”), XXIII.C (“DCAP Participation vs. Claiming the Dependent Care Tax Credit”), and XXIV (“What Expenses Can Be Reimbursed Under a DCAP?”). See also EBIA’s Consumer-Driven Health Care manual at Sections XV.B (“HSA Distributions Are Tax-Free If for Qualified Medical Expenses”) and XXIV.B (“HRAs May Reimburse Only Code § 213(d) Expenses”), and EBIA’s Self-Insured Health Plans manual at Section VI.B.1 (“Only Code § 213 Medical Care Receives Favorable Tax Treatment”).
Contributing Editors: EBIA Staff.