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DNA tests, the Nobel and medical deductions

Jim HamillALBUQUERQUE, N.M. — In 1962 the Nobel Prize in Medicine was shared by three people — Watson, Crick and Wilkins. Certain fame comes in threes. Example – the Chicago Cubs double-play trio of Tinkers to Evers to Chance. A fourth contributor to the 1962 Nobel, Rosalind Franklin, who had passed away by the time the award was given, may have been a victim of the Nobel’s restriction on only three recipients.

But the importance of the quartet’s work lives on. One of my daughters rescues dogs from the shelter. She picks the ones that others leave behind. We just tell the dogs there was active bidding for them. So far they seem to buy the story.

But those who are left behind often cause others to ask, “Ummm, what kind of dog is that?” So for their birthdays, I purchased two DNA tests to discover what kind of dogs these rescues are.

Thanks to Watson-Crick-Wilkins-Franklin, we now know the soup mix that gave birth to these dogs. The nucleotide molecules containing their genetic code told us that Katie has sort of a treeing coonhound and pretty much a border collie.

DNA testing is not just for shelter dogs. People do DNA tests for various reasons. One is to identify health issues that may be locked in that genetic code. Another is to determine ancestry — sort of like discovering what kind of dog you are.

Section 213 of the tax Code claims to allow a deduction for medical costs. I say “claims” because medical deductions are allowed only for those who itemize their deductions. Costs must also exceed 10% of the taxpayer’s adjusted gross income.

The result of these two restrictions is that very few people get a federal tax benefit on their tax return for medical costs (New Mexico allows a limited benefit). But the tax return is not the only place to get a tax benefit for medical costs.

Many employers offer a “flexible spending account.” This allows the employee to designate funds to an account that may be used to pay for qualified medical costs (those allowed by Section 213).

FSA-designated funds are exempt from federal income taxes (and also New Mexico income tax) and social security taxes. This exclusion from income creates a similar result to a full deduction for the medical cost.

When employers establish an FSA they hire an administrator. This administrator should be checking to be certain that costs are qualified Code Section 213 medical costs before allowing a reimbursement from the employee’s account.

Sometimes employees need to prove to the administrator that a particular item is a qualified medical cost. Last month the IRS released a ruling to help with this proof.

An employee sought genetic testing from a company that provided information on both ancestry and health issues using a DNA sample collected by the individual.

The IRS reached several conclusions in this ruling. First, if a particular cost includes a qualified medical cost and a non-qualified cost, the allowed tax deduction could be claimed only after an allocation between the deductible and non-deductible elements.

Second, costs incurred for diagnosis of diseases are qualified medical costs. Third, testing to determine if a disease may or may not be present is a part of this qualified diagnosis. Fourth, a physician need not recommend a test for it to qualify.

Based on these conclusions, IRS said that the DNA testing is a qualified tax deduction. However, the company that did this particular test provided information on both health issues and ancestry. There are many companies that do this testing, and not all may provide both items.

But because this test provided ancestry information, which does not qualify as a medical-related cost, the taxpayer requesting the ruling would be required to allocate the total test cost between the deductible (health) and non-deductible (ancestry) portion. The FSA can reimburse only the health-related cost.

So there you go — we now know the tax answer. What we don’t know is how an employee allocates the total cost between the two elements of the testing. The ruling says the taxpayer “may use a reasonable method.” I hear border collies are pretty smart — I may see if mostly Border collie has a solution.