chevron-down Created with Sketch Beta.
September 21, 2023 Policy Point

When Gender-Affirming Healthcare Becomes Illegal, Will It (Still) Be Tax-Deductible?

Diane Kemker

We are living in a time of unprecedented legal attacks on the health, safety, and existence of transgender people. These attacks include laws restricting or even prohibiting access to gender-affirming health care, including prescription drugs and surgical treatments. Currently, at least eighteen states have banned gender-affirming care for minors; another twelve are considering similar laws; Missouri’s governor sought to ban gender-affirming care for all ages; and three states (Oklahoma, Texas, and South Carolina) have considered extending the ban to transgender people up to 26 years old. On May 17, 2023, a law took effect in Florida that makes refilling hormone prescriptions nearly impossible for approximately 80% of transgender adults, many of whom have been on such treatments for years. On September 1, 2023, Texas became the most populous state to ban gender-affirming care for minors, including those already undergoing treatment who must be taken off of it.

With or without health insurance, gender-affirming care is expensive. Since 2011, when the IRS acquiesced in O’Donnabhain v. Commissioner, the tax-deductibility of at least some gender-affirming healthcare has, however, seemed secure. A new question arises when this care is illegal at the state level: is it still deductible for federal income tax purposes? Neither the Internal Revenue Code provisions nor the regulations contain a clear answer. Current federal tax law does not contemplate that appropriate medical care might be lawful in one state while being banned (or even criminalized) in another. Although Section 213 does not condition medical expense deductibility on the legality of the treatment, the regulations (and Publication 502) expressly state that “[a]mounts expended for illegal operations or treatments are not deductible.”

As more forms of gender-affirming care are restricted or outlawed at the state level, taxpayers will have to determine whether they may still take a deduction for them. The impact will be felt as soon as the 2023 tax year. In the current environment of anti-trans legal panic, the tax laws must not make an increasingly desperate situation even worse. This essay suggests that the regulations under section 213 should immediately be amended to clarify that so long as gender-affirming care is lawful where provided, the associated expenses are tax deductible, regardless of their status under the state law of the taxpayer’s residence.

I. Current Law: Medical Expenses, Section 213, and O’Donnabhain

Uninsured medical expenses incurred for oneself or one’s dependents are among the most significant expenses a taxpayer may incur. In fact, nearly two-thirds of all bankruptcies in the United States are the result of medical debt. In recognition of the impact of large medical expenses on taxpayers’ ability to pay (and real income for the year), section 213(a) permits “as a deduction the expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, [their] spouse, or a dependent…to the extent such expenses exceed 7.5 percent of gross income.” The section also permits the deduction of associated expenses for transportation and lodging, so long as the travel is “primarily for and essential to receiving medical care.” The current medical expense deduction is subject to a 7.5% adjusted gross income (AGI) floor, reflecting a compromise with the rule of section 262(a) that “no deduction shall be allowed for personal, living, or family expenses.” Transition-related expenses today can run from $125,000 to $140,000, including both ongoing and one-time expenses, some or all of which may not be covered by insurance—expensive enough to exceed the AGI floor for all but the most high-income taxpayers, especially if the patient must travel out of state to receive care (as many must, to find the experienced, specialized surgeons who know how to perform these procedures).

Section 213(d)(9) imposes a further limitation on deductibility. That part of the statute defines “medical care” to exclude “cosmetic surgery or other similar procedures, unless the surgery or procedure is necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease.” Excluded cosmetic surgery is defined as “any procedure which is directed at improving the patient’s appearance and does not meaningfully promote the proper function of the body or prevent or treat illness or disease.”

Feminizing surgery for transwomen/transfeminine patients may include orchiectomy (removal of testicles); penectomy (removal of the penis); vaginoplasty, clitoroplasty, and labioplasty; breast augmentation (with implants, tissue expanders, or fat transplants); abdominoplasty (tummy tuck); gluteal augmentation (buttock lift); voice feminizing therapy and surgery; as well as facial feminization surgeries, which may include forehead contouring; eye and eyelid modification; cheek augmentation (with implants, fat transplants, or cheekbone reshaping); nose reshaping (rhinoplasty); lip lift and augmentation (with implants, fillers, or fat transplants); jaw angle reduction; and chin width reduction. Transwomen may also obtain a tracheal shave (to minimize the thyroid cartilage known as the Adam’s apple); and changes to the hairline including hair transplantation.

For transmasculine individuals, the most frequent surgery is bilateral mastectomy, with chest reconstruction. Hysterectomy is also common and is usually required before vaginectomy, scrotoplasty and/or phalloplasty. Complete or partial oophorectomy (ovary removal may be used, depending in part on whether the person will be taking testosterone. Metoidioplasty (clitoral release of the testosterone-enlarged clitoris) is one approach to genital reconstruction, focusing on preserving erectile capacity and erotic sensation. An alternative is phalloplasty, using grafts to create a phallus that more closely resembles an erect male-assigned penis in appearance with erectile capacity created by a penile implant (a subsequent surgery). Phalloplasty has a high rate of complications, many of which require subsequent surgery. Either of these is typically performed together with scrotoplasty (using tissue of the labia majora and silicone implants). Urethroplasty permits urination through the clitoris, but it carries the risk of fistula requiring further surgery.

The specific medical details of these evolving procedures are less significant for tax purposes than the fact that many of them serve both functional and appearance-related ends. Deductible, or not? In O’Donnabhain, Tax Court Judge Halpern helpfully summarized the somewhat convoluted inner workings of Section 213.

The best way of framing the question of deductibility is to view the medical-expense provisions in the Code as creating a series of rules and exceptions. Section 262(a) creates a general rule that personal expenses are not deductible. Section 213(a) and (d)(1) then creates an exception to the general rule for the expenses of medical care if they exceed a particular percentage of adjusted gross income. Section 213(d)(9) then creates an exception to the exception for cosmetic surgery. And section 213(d)(9)(A) then creates a third-order exception restoring deductibility for certain types of cosmetic surgery.

The question of which expenses related to gender-affirming care are deductible, and which are not, as well as the general deductibility of gender-affirming care was addressed by the Tax Court in 2010. In O’Donnabhain v. Commissioner, the Service denied Rhiannon O’Donnabhain a deduction of nearly $22,000 in uninsured transition-related medical expenses incurred in 2001. (In that year, the standard deduction for a single filer was just $4550, so O’Donnabhain reasonably itemized her deductions to minimize her tax liability.) Her uninsured expenses were broken down as follows:

$19,195 to Dr. Meltzer for surgical procedures, including $14,495 for vaginoplasty and other procedures, $4,500 for breast augmentation, and $200 towards a portion of petitioner’s postsurgical stay at Dr. Meltzer’s facility; (2) $60 for medical equipment; (3) $1,544 in travel and lodging costs away from home for presurgical consultation and surgery; (4) $300 to Ms. Ellaborn for therapy; (5) $260 for the consultation for a second referral letter for surgery; and (6) $382 for hormone therapy.

In a lengthy decision including five concurrences and partial concurrences/partial dissents, an en banc panel of nine Tax Court judges held that the expenses associated with surgery and hormones were deductible, while the expenses of breast augmentation were not (treating them as cosmetic). The decision is controversial among scholars, as illustrated by a rewriting of the opinion from a feminist and LGBTQ point of view. Nonetheless, there is consensus on the deductibility of the most significant expense, genital reconstruction (which may actually involve multiple surgeries), as well as the ongoing (potentially lifelong) expense of hormone therapy.

Recent state legislation, however, calls this seriously into question.

II. The Section 213 Regulation and State-Level Bans on Gender-Affirming Care

As noted above, the regulation promulgated under section 213 expressly excludes “illegal operations or treatments” from deductibility and restricts the deductibility of medication to “items which are legally procured.” IRS Publication 502 defines deductible medical expenses as “payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners.” Under the category of operations, it states, “You can include in medical expenses amounts you pay for legal operations that aren’t for cosmetic surgery.” Taxpayers also “can include in medical expenses the cost of a legal sterilization (a legally performed operation to make a person unable to have children).”

The legality of gender-affirming care, including surgery and hormone therapy, is now under attack across the country. Currently, these laws overwhelmingly focus on minors up to age 17, but efforts to restrict care for adults are also underway. This situation is likely to get worse long before it gets any better. The current tax provisions simply do not contemplate our current situation, in which (i) a medical procedure, treatment, or drug that has long been approved by the American Medical Association is lawful in some states and changed from lawful to illegal in others, and (ii) in which taxpayers may be crossing state lines to obtain very expensive medical care in a state where it is still legal, when it has been outlawed at home.

The closest the Code comes to addressing anything like this is in its treatment of cannabis, which is legal for adults for all purposes in twenty-two states; permitted for medical use in many others; and entirely prohibited in others. The difference, however, is that cannabis is still a Schedule I drug that is prohibited at the federal level, and thus it is clearly not tax-deductible, even when prescribed for medical use. IRS Publication 502, under “Controlled Substances,” explicitly states, “You can’t include in medical expenses amounts you pay for controlled substances (such as marijuana, laetrile, etc.) that aren’t legal under federal law, even if such substances are legalized by state law.” Similarly, under Section 280E, cannabis businesses (but not other unlawful businesses) are prohibited from deducting even “ordinary and necessary” business expenses (like rent and employee salaries).

Beyond FDA approval of hormone therapy, however, gender-affirming care is not federally regulated. State-level bans on gender-affirming care therefore cannot be analogized to state bans on cannabis for purposes of assessing the deductibility of those expenses. Arguably, state-level bans on gender-affirming care are as irrelevant to federal income tax-deductibility as state laws against other illegal businesses are to the deductibility of their ordinary and necessary business expenses under section 162. Current law, however, is far from clear.

III. Recommendation

As this essay has pointed out, current Treasury regulations condition the deductibility of medical expenses (for operations, treatments, and medicine/drugs) on their legality. Scholars have recommended eliminating this requirement entirely, arguing that “the denial of a deduction for unlawful medical expenses conflicts with the principle allowing the patient a deduction for whatever treatment the patient chooses so long as it is based on a bona fide effort to deal with the illness.” The dangers of incompetent, unlicensed transgender care are well-documented, however, and because transgender patients are already vulnerable, it seems ill-advised to put unlicensed, illegal care on the same tax footing as legitimate licensed medical treatment.

I would recommend a much narrower modification and clarification of current law. Recall that the current regulations include the sentence, “Amounts expended for illegal operations or treatments are not deductible.” I recommend that this sentence be stricken and replaced with the following: “Amounts expended for operations or treatments legal where rendered are deductible, regardless of whether they are legal in the taxpayer’s state of residence.”

Similarly, the section 213 regulations currently include the sentence, “The term ‘medicine and drugs’ shall include only items which are legally procured.” This sentence should be amended to read, “The term ‘medicine and drugs’ shall include only items which are legally prescribed or procured where obtained.”

Both these changes are intended to clarify that so long as the medical procedure or the prescribed medications are not prohibited under federal law or under the law where the medical service/products are procured, their deductibility is not conditioned on their lawfulness (or their lawfulness for a particular use or for a particular patient) under the state law of the taxpayer’s state of residence.

IV. Conclusion

As a practical matter, the tax-deductibility of gender-affirming care will affect a limited number of taxpayers. Few taxpayers paying for hormone treatment for their teenage children (and few teenage taxpayers) would be likely to itemize deductions based on the cost of the types of treatment usually made available to minors. The standard deduction for 2023 ($13,850 for a single taxpayer, $20,800 for a head of household, and $27,700 for a married couple filing jointly) is likely to exceed medical expenses when surgery is not included. However, a taxpayer who is itemizing for other reasons may seek to deduct these expenses as well and should be able to do so. More importantly, section 213 permits the deduction of expenses incurred for dependents up to age 19 or up to age 24 if they are full time students. A significant number of trans patients still living at home may seek to undergo surgery between the ages of 18 and 24. A large and growing number of states have laws in place making this care illegal. As some states move more aggressively to restrict access to gender-affirming care for trans people of any age, the tax-deductibility of such care will become an even more acute issue.

Transgender Americans and their families face unprecedented threats from right-wing state legislatures and governors—what Nancy Knauer has called a “politics of eradication.” In the face of this hatred and bigotry, trans people will continue to undergo the hardship and expense required to obtain the gender-affirming care they need and desire. At least so long as this care remains legal in the states that provide it, the Service should immediately clarify that qualifying expenses remain deductible. Respect for the dignity, the lives, and the economic well-being of thousands of our fellow trans citizens and their families demands no less.

    Diane Kemker

    Visiting Professor of Law, Southern University Law Center, Baton Rouge, LA

    Entity:
    Topic:
    The material in all ABA publications is copyrighted and may be reprinted by permission only. Request reprint permission here.