Tax deductions for medical expenses and health insurance

Elizabeth Rosen
by Elizabeth Rosen, Contributor

Tax Deductions for Medical Expenses

Your medical expenses may be steep, but at least you have the option of deducting them on your tax return.

The IRS allows medical tax deductions for “the prevention or alleviation of a physical or mental defect or illness,” a relatively broad category.

Common types of medical expenses that may be deducted include the following:

  • Fees paid directly to doctors, dentists, chiropractors, psychologists and practitioners of Christian Science
  • Hospital and nursing services
  • False teeth, wheelchairs, guide dogs, and laser eye surgery
  • Any prescription drugs, including those for nicotine withdrawal
  • Fare for an ambulance, taxi, bus, or train used for transportation to medical care, or mileage from your car at a standard mileage rate
  • The cost of participating in a weight loss program for obesity

Tax deductions are not allowed for most cosmetic surgery, funeral or burial expenses, toothpaste, or toiletries. Additionally, you may not deduct expenses that you received reimbursement on during the year.

To claim medical expenses, you must itemize your tax deductions using IRS Tax Form 1040, Schedule A. Keep in mind that you may only deduct the medical expenses that exceed 7.5% of your adjusted gross income.

You may be able to combine your discretionary medical expenses into a single year in order to surpass the 7.5% tax deduction limitation. You can also add in expenses paid on behalf of a spouse, a dependent, or (in some cases) parents. Additionally, if you are able to include insurance premiums paid by an employer-sponsored health insurance plan, cafeteria plan, or HRA (Health Reimbursement Arrangement) in Box 1 of your W-2 Form, you may deduct those as well.

Tax Deductions for Health Insurance

These days, health insurance is a fiercely debated issue in the United States. To offset the high cost of health insurance, there are some federal tax deductions that may benefit you.

If your employer provides group health care coverage, you are not required to pay taxes on the contributions to your health insurance premiums. If your employer does not provide medical coverage, a Health Savings Account (HSA) may be able to help you.

An HSA is an above-the-line tax deduction that can reduce your federal income tax liability. The major benefit of HSAs is that they are owned and managed by individuals ― so account holders can keep the funds even if they change jobs. With an HSA, your employer can make tax-free contributions to your account and you can save money tax-free. The funds deposited into an HSA are exempt from federal income tax, as long as the money is used to pay for out-of-pocket health care expenses.

Similar to retirement accounts, the investment earnings and interest from your HSA contributions will accumulate tax-free. Funds can be carried over from year to year, and money can be withdrawn in retirement (for non-qualified expenses) with no penalties ― features that attract many higher-income individuals.

Additionally, HSA account holders who are aged 55 and older may make $1,000 annual catch-up contributions. Statutory contribution limits are decided by the IRS every year, and the limits are enforced for deposits made by the account holder and his/her employer.

HSA funds can be used to pay for a variety of health care expenses ― including prescriptions, doctor’s visits, hospital stays, medical tests, dental care, medical equipment, over-the-counter drugs, and long-term care insurance premiums. Funds are typically accessed with a debit card or checks (supplied by the health insurance provider).

If the account holder dies, any funds left in an HSA can be transferred tax-free to a spouse or other beneficiary, who will have to pay taxes on distributions. Also keep in mind that funds withdrawn for nonqualified medical expenses are subject to a 10% penalty (for those younger than 65) and income taxes.

While medical expenses and health care expenses can be very steep, there is some tax relief available. Having a solid understanding of the possible tax benefits will help you make the most of your tax deductions.