Medical Expense Deductions Under HOTMA: What Counts and How to Calculate Them Correctly

Erica Davis
May 27
4 min read

Medical expense deductions can make a meaningful difference for eligible households—but HOTMA changed how the deduction is calculated. Here’s what counts, who qualifies, and how to apply the updated threshold correctly.

📌 Introduction

Medical expense deductions can reduce adjusted income for eligible households—but they are also one of the areas most easily miscalculated.

Under HOTMA, the rules did not disappear, but the calculation changed.

👉🏾 The old 3% threshold is no longer the standard rule

👉🏾 HOTMA generally moves the threshold to 10% of annual income

👉🏾 Some households may qualify for hardship or phase-in relief

Getting this right matters because the deduction can directly impact tenant rent in subsidy-based programs.

📊 Who Qualifies?

Medical expense deductions are available only to elderly or disabled households.

To qualify:

The head, co-head, or spouse must be:
- 62 or older, or
- Disabled, as defined by program requirements

👉🏾 If only a dependent is elderly or disabled, the household does not qualify for the medical expense deduction

👉🏾 This deduction is most commonly applied in HUD-assisted programs and may impact layered files depending on the programs involved.

📐 The HOTMA Threshold: What Changed?

Before HOTMA, eligible medical expenses were generally deductible only to the extent they exceeded 3% of annual income.

Under HOTMA, the standard threshold is now generally 10% of annual income.

That means:

Total Allowable Medical Expenses − 10% of Annual Income = Medical Expense Deduction

👉🏾 Only the amount above the threshold is deductible

👉🏾 Expenses below the threshold do not reduce adjusted income

📊 Example 1: Standard HOTMA Calculation

Annual income: $18,000
10% threshold: $1,800
Allowable medical expenses: $3,200

Calculation: $3,200 − $1,800 = $1,400 medical expense deduction

👉🏾 The household receives a $1,400 deduction—not the full $3,200

📊 Example 2: Expenses Do Not Exceed the Threshold

Annual income: $24,000
10% threshold: $2,400
Allowable medical expenses: $1,900

Calculation: $1,900 − $2,400 = $0 deduction

👉🏾 Because expenses do not exceed 10% of annual income, no medical deduction is applied.

📌 Hardship and Phase-In Relief

HOTMA also introduced hardship relief provisions for certain households.

Depending on program rules and implementation guidance, some households may temporarily qualify for a lower threshold instead of the full 10%.

This may include:

Households previously receiving medical deductions under the old threshold
Households experiencing qualifying financial hardship
Temporary relief periods where a reduced threshold applies

👉🏾 This is not automatic

👉🏾 The file must clearly document why the household qualifies for hardship or phase-in relief

👉🏾 Always follow current HUD, owner/agent, PHA, or program-specific guidance

📊 Example 3: Hardship Relief Calculation

Annual income: $18,000
Allowable medical expenses: $3,200
Temporary hardship threshold: 5%

5% threshold: $18,000 × 5% = $900

Calculation: $3,200 − $900 = $2,300 medical expense deduction

👉🏾 Under hardship relief, the deduction may be higher than the standard 10% calculation

👉🏾 But the file must support why the hardship threshold applies

📌 What Counts as a Medical Expense

✔️ Eligible Expenses May Include:

Health insurance premiums
Medicare premiums
Prescription drug plans
Prescription medications
Doctor, hospital, dental, and vision costs
Copays and deductibles
Medical devices such as hearing aids, wheelchairs, walkers, or prosthetics
Medical supplies
Transportation to medical appointments
In-home attendant care, when medically necessary
Therapy or counseling
Home modifications required for medical needs, if properly supported

👉🏾 The expense must be medically necessary, unreimbursed, and properly documented.

❌ Expenses That Generally Do Not Count

Reimbursed expenses
Cosmetic procedures
General wellness expenses
Over-the-counter medications, unless prescribed
Vitamins or supplements, unless prescribed
Gym memberships, unless formally required as part of a treatment plan
Pet care, including emotional support animal care

👉🏾 If the resident is reimbursed by insurance or another source, only the out-of-pocket portion may be counted.

📂 Documentation Requirements

Medical expenses still require documentation.

Examples include:

Insurance premium statements
Social Security or Medicare documentation
Pharmacy printouts
Receipts or invoices
Provider statements
Transportation logs
Physician statements for medical necessity
Proof of unreimbursed out-of-pocket costs

👉🏾 Self-certification alone is not enough for medical expense deductions

👉🏾 The file should clearly support both the expense and the calculation

📊 Anticipated Expenses Matter

Medical expenses are generally projected for the upcoming 12-month certification period.

That means you should not simply copy last year’s total without review.

Use prior expenses as a starting point, then adjust for known changes.

📊 Example 4: Projecting Medical Expenses

A resident spent $2,400 last year on prescriptions.

This year, their doctor prescribed an additional medication costing $75 per month.

Additional annual cost: $75 × 12 = $900

Projected medical expenses: $2,400 + $900 = $3,300

👉🏾 The projected amount should reflect what is reasonably expected for the upcoming certification period.

⚠️ Common Calculation Mistakes

❌ Using the old 3% threshold as the standard calculation

❌ Deducting all medical expenses dollar-for-dollar

❌ Forgetting to review hardship or phase-in eligibility

❌ Counting reimbursed expenses

❌ Using last year’s expenses without projecting forward

❌ Missing recurring costs like prescriptions, premiums, or transportation

❌ Relying on self-certification without supporting documentation

👉🏾 Most errors happen because teams either apply old rules or fail to document the calculation clearly.

🔄 A Practical Approach

Confirm the household qualifies
Identify all unreimbursed medical expenses
Obtain proper documentation
Project expenses for the upcoming 12 months
Apply the correct HOTMA threshold
Review whether hardship or phase-in relief applies
Clearly document the calculation in the file

👉🏾 The goal is not just to calculate the deduction—it is to support it.

📋 Quick Checklist

Household qualifies as elderly or disabled
Expenses are allowable
Expenses are unreimbursed
Documentation is included
Expenses are projected for the certification period
Correct HOTMA threshold is applied
Hardship or phase-in relief is documented, if used
Final deduction is clearly shown in the file

🎯 The Bottom Line

Medical expense deductions still matter under HOTMA—but the calculation has changed.

👉🏾 Do not default to the old 3% threshold

👉🏾 Use the correct HOTMA threshold

👉🏾 Review hardship relief carefully

👉🏾 And make sure every deduction is supported in the file

For eligible households, this deduction can make a real difference. For compliance teams, getting it right protects both the resident and the file.

💼🏾 Need help training your team on HOTMA deductions and adjusted income calculations? The TCC Firm supports site and compliance teams with certification training, file reviews, and compliance alignment across LIHTC, HUD, HOME, and Rural Development programs.

👉🏾 Contact us to get started.