Tax Deductions for Medical Expenses
Medical expenses, especially if they are unexpected, can take a bite out of your savings. However, you may be able to find some tax relief using these tax deduction tips.
Itemized Deduction for Medical Expenses
If you are itemizing your deductions, you can deduct medical and dental expenses on Schedule A of Form 1040. This is the only place on your tax return where you can directly deduct medical expenses. If you take the standard deduction rather than itemizing deductions, you will be unable to deduct your medical expenses.
You can only deduct the portion of your medical expenses that exceeds 10% of your Adjusted Gross Income (AGI). For example, if your AGI is $60,000 and you have $7,500 in qualified medical expenses, you are allowed to deduct $1,500 of your expenses (because 10% of your AGI is $6,000, and $7,500 minus $6,000 equals $1,500).
Due to this threshold, it may make sense for you to try and bunch your medical expenses into a single year. In other words, if you know that you won’t exceed the threshold in one year, you may want to put off any optional medical expenses until the following year in order to meet the AGI requirement.
What Types of Medical Expenses Qualify?
Most common medical expenses are considered “qualifying expenses” for Federal income tax purposes. These include the following:
• Fees for doctor’s visits and hospital stays
• Prescription medication
• Insurance premiums (only if they were not paid for with pre-tax dollars or deducted elsewhere)
• Transportation for medical care
• Long term care insurance premiums
What Types of Medical Expenses Do Not Qualify?
Examples of medical expenses that do not qualify for a deduction include the following:
• Over-the-counter medications
• Cosmetic surgery
• Nutritional supplements
• Teeth whitening treatments
For more information about what can and cannot be deducted, please see IRS Publication 502 (Medical and Dental Expenses).
What Are Some Other Ways to Reduce My Taxes?
If your employer offers a Flexible Spending Account (FSA), you should consider signing up for it. With FSAs, money is taken out of each paycheck and put into a special account. The money is taken out pre-tax so you will not have to pay income tax on it. The catch is that the money can only be used for qualified medical expenses. Additionally, with most FSAs, the money also disappears at the end of the calendar year. So you need to “use it or lose it.”
If you have a high deductible health care plan, you may be able to set up a Health Savings Account (HSA). It is similar to a FSA in that it allows you to pay for medical expenses with pre-tax money. However, unlike an FSA, you are not required to use the money in a particular year. Furthermore, the money stays with you even if you change employers.
If you make a contribution to an HSA outside of a payroll deduction, you can deduct the amount on Line 25 of Form 1040. This is called an “above-the-line” deduction – it reduces your AGI without requiring you to itemize deductions.
For both FSAs and HSAs, you must use the money to pay for qualified medical expenses. If you use the money for something that does not qualify, or you simply withdraw the money for no specific reason, you will likely have to include it as income on your tax return and pay income tax on it. For HSAs, you will also be subject to a 20% penalty.
No Double Benefits
You cannot deduct any medical expenses that have been paid for by somebody else or that you paid for with pre-tax dollars. This means you can’t deduct any expenses that have been paid using pre-tax money from an FSA or HSA. Likewise, you cannot deduct pre-tax insurance premiums from your employer or any self-employed insurance premiums that you deducted on Form 1040.
For more information, please see IRS Publication 969 (Health Savings Accounts and Other Tax-Favored Health Plans).