Deductibility of Expenses for Gender Reassignment

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February 4, 2010

As many people are aware, taxpayers are sometimes able to deduct medical expenses on their tax returns. This option is available if: 1) the taxpayer itemizes deductions on his or her tax return; and 2) medical expenses exceed 7.5% of the taxpayer's adjusted gross income for the year.

Medical expenses are generally defined as "the costs of diagnosis, cure, mitigation, treatment or prevention of disease and the costs for treatments affecting any part of function of the body." Cosmetic procedures are explicitly not allowable as deductible medical expenses.

A recent Tax Court opinion examined whether expenses for gender reassignment procedures, including therapy, hormone treatment, gender reassignment surgery and breast augmentation surgery, are deductible medical expenses.

The basic facts are as follows: the taxpayer, born a genetic male, was diagnosed with gender identity disorder (GID) by her therapist, with concurring diagnoses by two other professionals. The taxpayer undertook a treatment regimen consisting of: 1) hormone therapy; 2) living as a female in public; and 3) sex reassignment surgery. Although the hormone therapy had given the taxpayer relatively normal breast size and shape, she underwent breast augmentation surgery to enhance that part of her body. The taxpayer incurred over $20,000 of medical expenses related to her treatment, for which she sought a medical expense deduction.

The IRS disallowed the deduction, maintaining that they were nondeductible, cosmetic procedures, aimed at improving the taxpayer's appearance; their position was that the procedures did not treat an illness or disease or meaningfully promote the proper function of the body.

As a result, the Tax Court examined the following issues: 1) whether GID is a "disease"; 2) whether the taxpayer had GID; and 3) whether her treatment "treated" GID.

On the first point, the Court concluded that GID is a well recognized and serious mental disorder, and that the legislative history and relevant regulations include mental disorders as "diseases". The Court also found that the professionals treating the taxpayer were in the best position to conclude whether she had GID or not, and they found that she did. Since the professionals were licensed, reputable and competent, the Court had no reason to doubt their diagnosis. On the third point, the Court concluded that the treatment the taxpayer underwent is considered appropriate and effective by those within the mental health community, and that the taxpayer would not have undertaken the treatment were it not for the severity of her condition.

As a result, the Tax Court ruled mostly in the taxpayer's favor. However, the Court did indicate that the taxpayer's breast augmentation surgery was cosmetic in nature. This was because hormone therapy had left the taxpayer with "approximately B cup breasts with a very nice shape" and that the surgery did not meaningfully promote the proper function of the body. However, had the taxpayer's breasts not developed normally with hormone therapy the expenses may have been deductible.

If you have questions about this material or about medical expense deductibility generally, or need other help, please contact us.