In a highly publicized new private letter ruling, the IRS has effectively approved a medical deduction for a portion of the cost of a genetic testing service based on DNA samples (PLR 201933005, 8/16/19). The company involved in the ruling has been identified by numerous media sources as 23andMe, a prominent promoter of genetic testing to determine health status, traits and ancestry.
Generally, a taxpayer can deduct qualified expenses incurred for medical care to the extent the total for the year exceeds 10 percent of adjusted gross income (AGI). The threshold was recently lowered to 7.5 percent of AGI, but only for 2017 and 2018.
For these purposes, “medical care” includes the diagnosis, cure, mitigation, treatment or prevention of disease or for the purpose of affecting any structure or function of the body, such as medical, laboratory, surgical, dental and other diagnostic and healing services. But expenses incurred for general health reasons, such as the cost of a gym membership or diet foods, are personal and nondeductible.
If you participate in a healthcare flexible spending account (FSA), you may use the funds to pay for qualified medical care expenses that would be deducible.
The taxpayer in the new ruling intends to use FSA funds to purchase genetic testing services and ancestry reports from 23and Me. The company provides a collection kit for collecting DNA samples that are then sent to a third-party lab for “genotyping.”
Once the genotyping is analyzed, 23andMe provides health care services, generating reports with results from the laboratory and general information about genetic health risks, carrier status, wellness and traits. The main objective is to encourage customers to provide the information to a healthcare provider for additional testing, diagnosis or treatment. The company’s services and reports may be purchased through its website or resellers, but you can’t purchase the health services without buying services relating to ancestry.
Accordingly, the IRS indicates in the new ruling that 23andMe’s services contain items that are considered medical care for tax deduction purposes, like the DNA collection kit and the genotyping, but they also include nondeductible care (e.g., the reports providing general information to individuals). Thus, the taxpayer must make an allocation using a two-step process.
Step #1: The price of the DNA collection kit must be allocated between the ancestry services and the health services using a percentage (i.e., the cost of the health services / total cost of ancestry plus health services).
Step #2: For the health care services, the taxpayer may use a reasonable method to value and allocate the cost of the health services between services constituting medical care (e.g., testing at the laboratory) and other services or items (e.g., reports providing general information on a test result).
Of course, an IRS private letter ruling may only be relied on by the taxpayer requesting it, but it can serve as a valuable reference point for others. 23andMe has created an online calculator to help its customers determine the amount eligible for this tax break.