Medical Expenses & Income Tax Deductions
March 10, 2010
Your medical expenses can be income tax deductions depending on how you file your taxes and how high your medical bills are. We all know that health care costs just keep going up, lets take a look at how you might be able to get tax deductions for these expenses.
Tax Deduction Requirements
In order to be able to claim medical expenses as income tax deductions, your health care costs for the past year must be greater than 7.5% of your adjusted gross income (line 38 of tax form 1040). If you are eligible you can claim all of the covered expenses in excess of the 7.5% of adjusted gross income threshold. The other requirement is that you have to itemize your deductions. If you use form 1040 EZ and claim the standard deduction then you can’t deduct your medical expenses.
The idea behind using a percentage threshold as opposed to a dollar amount was to prevent wealthier tax payers from claiming expenses that they can actually afford while assisting less wealthy taxpayers who could get in serious financial trouble due to medical expenses. Of course, 7.5% of your AGI is still a lot of money for most people so many of us won’t be able to claim these expenses as deductions.
If you are able to claim them, the expenses would are calculated and included on Schedule A of your tax returns, when filing IRS form 1040.
What Medical Expenses Can You Claim?
In the eyes of the Internal Revenue Service the term medical expenses should be thought of in more of a health care expenses frame of mind; meaning virtually any expenses that you incurred throughout the year to provide for the health of you, your spouse, your children and anyone else that would be considered your dependent for tax filing purposes.
Health care would include the costs for some health insurance coverages, dental care, eye care, as well as physical and mental health care costs. The list includes doctors’ visits, tests, surgery, therapies and medications. If it is not covered by your insurance and if you are not reimbursed for it, it can be claimed as one of your expenses. Essentially anything that is medically necessary to restore you to good health can be considered deductible medical expense, from abortions to x-rays.
Also included are things such as capital improvements to where you live like a wheelchair ramp, elevator or special bathroom fixtures. You can include medical expenses for transportation; to and from appointments, bus fare, cab fare, ambulances, as well as special modifications or equipment to make your vehicle handicap accessible.
Which Medical Expenses Can’t Be Claimed?
Of course, there are things that you can not include when adding up your total medical expenses. For an understanding of what types of things cannot be included as deductible expenses you have to consider whether it is something that could be considered voluntary or cosmetic as opposed to medically necessary.
Simple examples of items that are not deductible would be: cosmetic surgeries, non-prescription treatments of any kind, health club memberships, hair transplants, maternity clothes, and funeral arrangements.
For a complete list and explanation of all the medical expenses that can and cannot be included check the U.S. Department of the Treasury, Internal Revenue Service, Publication 502.
Flexible Spending Accounts
One alternative to using medical expense deductions to offset your health care costs is to check if your employer offers a section 125 plan, frequently known as a flexible spending plan or cafeteria plan.
A flexible spending account (FSA) allows you to put a portion of your salary into a special account that can later be used to pay for medical expenses. That money comes out of your salary pre-tax. This means that it lowers the total amount of your paycheck subject to federal income tax, and in doing so lowers your tax bill.
If you decide to use an FSA you have to carefully manage your receipts for medical expenses and submit them to the plan administrator, who reimburses you for qualified costs out of your FSA account balance. Here are some tips for getting the most from your flexible spending account payments.
The most important thing to remember is that you lose any unspent balance in your FSA at the end of the period so you need to estimate as closely as you can what your expenses will be in the coming year. Since this is so difficult to do, the IRS now allows you to spend money from your FSA balance through the middle of March of the following year. Make sure that your FSA plan administrator offers this option in your flexible spending account.
All posts by Debbie
Thanks for such a nice post !
Medical bills are a major financial concern for general people.To have a control over these,are the medicare guides that available on the Internet are very helpful.They really provide enough information to find permanent solution to deal with your expensive medical bill.
Both 2008 and 2009 we exceeded the 7.5%. Pub 502 is very thorough in explaining the can and cannot of deducting medial expenses. For the most part, common sense is all that is needed, but there are a few little “catches” that you have to watch out for…health insurance premiums, travel / lodging / meals if seeking treatments that require travel…Just read the pub – a few times.
Good coverage on the deductibility of medical expenses. I prepare taxes in season, and it’s amazing how few people ever get the benefit of actually being able to deduct anything. With the 7.5% threshhold you can have literally thousands of dollars in medical expenses count for nothing against your tax bill.
Another allowable med deduction that might help is health insurance premiums for coverage you have outside of an employer plan.
The FSA is a good way around it and they seem to be growing in popularity.
Good read!
I was surprised to find just how many items could be purchased with a 125 plan. I had used a 125 plan for years and always put more than I thought I might need. Only once did I have money to worry about spending near the end of the year. Worse comes to worse you can always get yourself an extra pair of glasses or stock up on over the counter drugs.
Another alternative is the Health Savings Account which I write about on my blog. While this money has more restrictions than a 125 you can save what you do not spend.