As medical costs climb, it’s nice to think you could deduct them from your taxes. And you can, but there are limits.
You have a threshold amount you have to spend out of pocket before you can deduct any medical expenses. You can only deduct the expenses left after the threshold is reached (we will explain). And there are limits to the types of medical expenses you can deduct, although the list is pretty long.
But if you paid for medical care during the tax year, it would be great to get to deduct some of it.
What Is the Medical Expense Deduction?
Legislative changes in 2019 lowered the threshold for deductions. It used to be anything over 10% of your adjusted gross income (AGI). Now it’s 7.5%.
For tax returns filed in 2021, taxpayers can deduct qualified, non-reimbursed medical expenses as long as the total amount is more than 7.5% of the 2020 AGI. But here’s the kicker — only the amount over the threshold is eligible for deduction, not your entire pot of medical expenses.
For example, if your AGI is $40,000, that means your threshold is $3,000. You have to subtract $3,000 from your total medical expenses to get the amount of your deduction. So, if you have exactly $3,000 in medical costs…too bad, no deduction. If you have $4,000, you can deduct $1,000.
There are other rules:
- You can’t include expenses that were reimbursed.
- If insurance paid the bill, it isn’t deductible.
- You can only include expenses paid during the tax year in question.
For the purposes of this deduction, medical care expenses include payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or payments for treatments affecting any structure or function of your body.
Tax Deductible Medical Expenses
While not everything is a deductible medical expense, the list is still pretty long. And it includes some items you might not expect.
Medical care expenses include the usual suspects — payments to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, and other medical professionals. They also include hospital and nursing home care.
A caveat: nursing home care is only a deductible medical expense if the reason you are there is for medical care. If you are, then meals and lodging are also deductible medical care expenses. However, suppose you are not in the nursing home primarily for medical care. In that case, only medical care costs you incur while there are deductible.
Here are some deductible costs you might not expect to see on the list.
- Weight loss programs for doctor-diagnosed diseases like obesity. However, diet food and health club dues don’t count.
- Admission and transportation to medical conferences about diseases that you, your spouse, or your dependents have. Meals and lodging don’t count.
- Dentures, reading or prescription glasses, contacts, hearing aids, crutches, wheelchairs, and service animals like guide dogs.
- Insurance premiums for medical care or long-term care insurance as long as it isn’t paid by an employer, and you pay the out-of-pocket expenses.
- Acupuncture, braille reading materials, disabled dependent care, face masks, lactation supplies, osteopathic care, and wigs recommended by a doctor to treat the mental health of someone with disease-related hair loss.
- Wipes for COVID-19 prevention.
For a complete list, see IRS Publication 502.
What If You’re Self-Employed?
If you are self-employed and have a net profit for the year, you are eligible for a self-employed health insurance deduction. This is not the same as a deductible medical care expense. The health insurance deduction is an adjustment to your income, not an itemized deduction.
Still, it's a tax deduction, and premiums you paid on the insurance policy covering medical care count. It also includes qualified long-term care insurance policy payments for you, your spouse, or your dependents. The policy can cover any child under the age of 27, even if they are not a dependent.
As a self-employed person, you may be able to deduct 100% of the amount you pay for health insurance for yourself, spouse, and dependents as an adjustment to your income.
What Is Not Deductible?
There are many items people have tried to deduct as medical expenses that are not. None of the following are deductible.
- Funeral or burial expenses
- Over the counter medications
- Toothpaste, toiletries, and cosmetics
- Most cosmetic surgery not included in disease treatment
- Nicotine gum or patches
- Maternity clothes
- Medications or drugs from other countries
- Veterinary fees (We know it’s your fur-baby, but you can’t count vet bills)
- Hair transplants, swimming lessons, vacations, and electrolysis
How to Claim Your Medical Expense Deduction
If you are considering this deduction, you are probably really sick or have other expensive health problems to deal with.
First, you must commit to itemizing your taxes instead of taking the standard deduction. Also, determine if the standard deduction lowers your tax bill more than claiming the medical cost deduction. It could save some time and effort if it is.
Use Schedule A Form 1040 Itemized Deductions. The form lets you do the math to calculate your deduction. Most tax preparation software can also walk you through the steps.
You need to keep excellent records for this to work. Ask your pharmacy and other care providers for statements, keep all your bills, and keep track of every single expenditure and expense.
Filing separately if you are married could get a larger medical expense deduction, but you could lose other tax breaks. Again, do the math to see which would lower your tax bill the most.
Filing separately, if your spouse has $6,000 in medical bills, your AGI is $75,000, and your spouse’s AGI is $25,000, your spouse can deduct any medical expenses over $1875 because the law only looks at your spouse’s AGI (in this case, $25,000).
$25,000 X 0.075 = $1,875
Your spouse can deduct $4,125 in medical care expenses.
On the other hand, if you file jointly, your AGI is now $100,000 for both of you. Only expenses over $7,500 are eligible. If you only have $6,000 in expenses, you have nothing to deduct.
When considering a medical care deduction, be sure to check your state tax law, too. If you pay state income taxes, most states also provide for this deduction. The good news is that it’s often far lower than the federal rate. Your state might only require medical expenses over 2% for deductibility.
If you purchased medical equipment or property and deducted it from your taxes in a previous year, then sold it later for a profit, you might need to report a capital gain on your return. The taxable gain is the amount of the selling price above the adjusted basis of the equipment or property.
If you have enough medical care expenses to warrant itemization and deduction from your taxes, the burden of poor health is enough. At least you can save on your taxes. It doesn’t cure anything, but every little bit helps.
Contact Top Tax Defenders if you want to know more.