At the same time Congress has pressed for antitobacco legislation and settlements against cigarette manufacturers, the IRS has been denying the deductibility of stop-smoking programs. In revenue ruling 79-162 (1979-1 CB 116), the IRS held that a taxpayer who had no specific ailment or disease could not deduct participation in a smoking-cessation program as a medical expense.
However, it also held that treatment for addiction to certain substances qualified as medical care: for example, alcoholism (revenue ruling 73-325) and drug addiction (revenue ruling 72-226). In response to a recent report by the Office of the Surgeon General, which concluded nicotine is an addictive drug and determined strong causal links between smoking and several diseases, the IRS reversed its twenty-year-old position. It held smokers could deduct the unreimbursed costs of smoking-cessation programs and the cost of prescription drugs designed to alleviate nicotine withdrawal (revenue ruling 99-28, 1999-25 IRB). However, smokers still can't deduct the cost of nonprescription drugs designed to help them stop smoking, for example, nicotine gum or patches.
Revenue ruling 99-28 analyzed the following scenarios. Two smokers, A lice and Bruce, wanted to quit smoking. Alice participated in a smoking-cessation program and purchased nicotine gum and patches that did not require a prescription. Alice had not been diagnosed as having any specific disease, and no physician suggested she participate in a stop-smoking program.
Bruce purchased drugs prescribed by a physician to help him stop smoking. The drugs helped Bruce alleviate the effects of nicotine withdrawal.
Neither Alice nor Bruce was reimbursed by health insurance or employee benefit plans for the cost of their attempt to kick the habit.
Now, however, because the IRS agrees that nicotine qualifies as an addictive substance (revenue ruling 98-28), Bruce's prescribed drugs would be considered treatment for his addiction to nicotine and would qualify as a deductible medical expense under IRC section 213(d)(1). Under section 213(b), however, the costs Alice incurred for nicotine gum and nicotine patches would not be deductible because they are not prescribed medications.
Observation. In a related news release (IR-1999-55), the IRS said smokers who paid for smoking-cessation programs or prescription drugs in prior tax years could also get a refund by filing amended returns for those years. In addition, CPAs should remind their clients that stop-smoking costs qualify as medical expenses and can be covered as tax-free benefits under an employee medical plan.
—Michael Lynch, CPA, Esq., professor of tax accounting at Bryant College, Smithfield, Rhode Island.