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Transgender-Inclusive Benefits: Taxability of Related Medical Expenses

The Internal Revenue Code treats many health insurance and medically necessary treatment costs favorably for employer payroll and individual income tax purposes.

On February 2, 2010, the U.S. Tax Court issued an important decision in O'Donnabhain v. Commissioner of Internal Revenue, ruling for the first time that necessary treatment for gender identity disorder qualifies as medical care under the Internal Revenue Code, and therefore costs related to that care are deductible from federal income taxes.

The court ruled that sex reassignment surgeries qualify as deductible medical expenses under IRS code § 213, reversing a previous IRS position that had denied transgender people the ability to list expenses for medical services related to sex reassignment as tax deductions. The ruling holds that gender identity disorder is considered a "disease" within the meaning of § 213(d)(1)(A) & (9)(B) and that hormone therapy and sex reassignment surgeries are recognized treatments for disease within the meaning of § 213(d)(1)(A) & (9)(B), and thus not "cosmetic surgery" excluded from the definition of deductible "medical care" by § 213(d)(9)(A).

While the court did not allow Ms. O’Donnabhain to deduct the costs of her breast augmentation, the opinion recognized that breast augmentation is considered a sex reassignment surgery in certain cases, and would be deductible for other transgender people with supporting medical documentation -- a finding that closely aligns with the WPATH Standards of Care.

This ruling should encourage employers to treat coverage for medically necessary transgender treatment (treatment that follows the WPATH SOC) no differently than other medically necessary treatments for tax purposes. Notably, the IRS did not appeal the Tax Court’s decision. Employers and individuals should consult with a tax expert, such as a CPA or tax attorney.