Just Say No: Pot Not Allowed As A Medical Expense

While the use of marijuana for medical reasons remains controversial, it’s becoming more mainstream. Currently, 14 states and DC have legalized medical marijuana in some form (you can check out the details here). That’s pretty interesting in and of itself since marijuana remains illegal for federal purposes.

From a tax perspective, the legality of medical marijuana raises all kinds of questions. State and local officials have been struggling for some time with whether to tax marijuana. In a tight economy, most states are inclined to take all of the revenue they can get though the idea of taxing marijuana (and thus, legitimizing it) makes some legislators squirm.

The feds haven’t been able to sort out how to treat medical marijuana from a tax perspective either. It’s a question loaded with all kinds of baggage since the criminality of marijuana today can be linked to the decision to tax it in the 1930s.

This issue has heated up over the past couple of days after an article that ran in Tuesday’s Wall Street Journal appeared to confirm that taxpayers cannot use the costs of medical marijuana for health care flexible spending accounts. This makes sense in the abstract as allowable expenses for these accounts tend to follow the Tax Code definitions of medical expenses which are allowable as deductions on Schedule A (this is absolutely the case under the new health care law). The IRS has previously declined to allow deductions for medical expenses related to illegal activity; their position is clearly stated in Pub 502 at p. 14:

You cannot include in medical expenses amounts you pay for illegal operations, treatments or controlled substances whether rendered or prescribed by licensed or unlicensed practitioners.

Or is their position quite so clear? TaxProf Blog suggested that the IRS might allow it, citing a letter from Chief Counsel to Sen. Charles Schumer (D-NY) which stated that “the cost of an herb may be an expense for medical care…” You can read the entire letter here as a pdf.

Perhaps there are details that I’m missing but I’m not sure that the letter clears up anything. As with many facets of how to treat medical marijuana for tax and other purposes, it appears that those in charge are merely tiptoeing around the question. In the letter, the term “marijuana” is never used explicitly – the term used is “herb”. While it’s my understanding that the specifics of the case involved medical marijuana used for the treatment of migraines, that isn’t specifically stated in the sanitized version of the letter. No use of “marijuana”, just the term “herb.” That could be St. Johns Wort or milk thistle as far as the IRS is concerned.

Also important? The IRS never once mentions the legality of the “herb” in the letter. If the IRS meant to take a position on this matter, it would, it would seem, need to actually reference the controversy over the legality. Its own position as stated in Publication 502 is contrary to what is alleged to be its stance from this letter on medical marijuana. I would suggest that the wording of this letter isn’t strong enough or detailed enough to give much certainty that medical marijuana would be considered an allowable medical expense (either as a deduction on Schedule A or for purposes of FSAs). It certainly wouldn’t fill me with enough confidence to want to be the test case on the subject.

That said, I don’t want my position to be misunderstood here. I actually believe that if, in fact, medical marijuana is considered a legal treatment for illness in some states and as such is allowable when prescribed, just as other controlled substances like Percocet or Vicodin, I think it absolutely should be both deductible at Schedule A and allowable as an expense as part of an FSA. I am just not certain that position is fully supported by IRS – their own publication would beg to differ. Your thoughts?

(Hat Tip: TaxProf Blog)

Kelly Phillips Erb

Kelly Phillips Erb is a tax attorney, tax writer, and podcaster.

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