Tax and the "mentally ill" - facts and figures

It has recently been made public the fact that billions of tax is due to taxpayers where they, or a family member, suffers from a mental illness.

The definition of a mental illness is wide and affects millions of people every day. So who does this impact, how much tax can they get back and how much could advisors stand to make? This article deals with some of these facts and figures.

Those affected are taxpayers where they, or a family member, are diagnosed with a mental illness such as depression, panic and anxiety disorders, personality disorders, alcoholism, drug addiction, sexual dysfunction, attention deficit disorder (ADD), attention deficit hyperactivity disorder (ADHD), insomnia etc. These illnesses are widespread and it is expected that it will affect more than 20% of taxpayers.

Suppose the following: Mr Smith, is 50 years old, is married, self employed and has one child. Mr Smiths medical aid contributions for the 2007 tax year (i.e. end 28 February 2007) was R2,500 per month and his medical scheme paid R20,000 of his total R25,000 of his medical claims for the year. Mr Smiths income is R500,000 for the 2007 tax year.

In the absence of any handicap, Mr Smith will only be able to deduct R1,300 per month (R15,600) of his medical aid contributions and none of his irrecoverable medical expenses of R5,000.

If, for example, Mrs Smith was diagnosed with depression during the 2007 tax year, all Mr Smiths medical aid contributions and all his irrecoverable expenses will be deductible for tax purposes. This means, at a marginal tax rate of 40%, Mr Smith is due R7,760 (R30,000-R15,600+R5,000) x 40% because his wife suffered from depression, a mental illness, during the 2007 tax year.

Mr Smith could be entitled to a similar, or greater saving in the 2008 tax year, and depending on his facts and circumstances may also be due a refund for previous tax years. Conceivably, these previously unknown tax findings, could save Mr Smith over R20,000. There are several complexities and anomalies in the legislation relating to the tax deduction of medical expenses. Taxpayers and their advisors are advised to take specialist tax advice to ensure tax claims are maximised.

Advisors with, say, just 20 affected taxpayers as clients could, therefore, save their clients over R400,000 and in the process earn reasonable advisory fees from doing so.