Medical Deductions

What is Medical Deduction

Medical Deductions are qualified medical and dental expenses for an individual, their spouse, and dependents that IRS allows a taxpayer to offset against their taxable income hence reducing tax payable.

Medical expenses include costs for the diagnosis, cure, mitigation, treatment, or prevention of disease, and for treatments affecting. Health insurance premiums paid by pretax dollars are included in this category (and other wide range of costs that may not fit directly into this category).

Deduction for Medical Expenses

The full list of medical deductions is found in IRS Publication 502. Below is a summary of what may count as a medical expense (but not limited to).

• Payments to medical practitioners and nontraditional medical practitioners (Physicians, dentists, surgeons, chiropractors, psychiatrists, and psychologists)
• In-patient hospital and residential nursing home care
• Payments for acupuncture treatments
• Inpatient programs to help with drugs Addiction, and also includes help in quitting smoking
• Costs to participate in a weight-loss program (on physician advice) including obesity (excluding payments for diet food or health club fees).
• Payments for Insulin and prescription drugs
• Payment’s for Admission and transportation to medical conferences about chronic diseases affecting an individual, their spouse, or dependents have (except meals and lodging)
• Costs for Dentures, reading or prescription eyeglasses, contacts, hearing aids, crutches, wheelchairs, and service animals
• Transportation and mileage costs to and from medical care(including tolls and parking)
• Costs for Insurance premiums for medical plans or qualified long-term care services and out-of-pocket costs paid by after taxes dollars. This is only applicable for costs treated as paid by the employer.

Standard Deduction or Itemized Deduction

IRS allows either the standard deduction or itemized deduction on your Form 1040 to reduce income subject to taxes

Itemized Deductions

To qualify for the medical expense deduction, you are required to itemize your expenses on IRS Schedule A (Itemizing means you don’t take the standard deduction). It only makes sense to take a medical deduction if the benefits are higher than the standard deduction.

Spouses can file separately to maximize higher tax savings. However, this calculation tends to be complex (it’s recommended to engage a tax professional for this).

Standard Deduction

The majority opt for the standard deduction since it usually gives the highest benefit.

The rates are as below;

Source: IRS

If you are self-employed, you may be eligible for 100% of medical costs incurred for health insurance for yourself, your spouse, and your dependents. Make this an adjustment to income rather than an itemized deduction.

If unable to claim 100% of paid premiums under self-employment, the remainder together with other medical expenses may be claimed as an itemized deduction on Schedule A (Form 1040).

Deduction for medical expenses not allowed by IRS

Below medical expenses are not allowable for tax purposes

• Funeral or burial expenses,
• Purchase of over-the-counter medicines, toothpaste, toiletries, cosmetics,
• Vacations or programs for the general health improvement
• Elective cosmetic surgeries.
• over-the-counter purchases of nicotine gum and nicotine patches
• Reimbursed expenses

IRS will only accept medical expenses incurred during the year. You must reduce your total deductibles by reimbursement either paid directly or on your behalf to a doctor, hospital, or another medical provider.

In general, medical care premiums paid after-tax dollars can be added to your other medical expenses.

However, certain medical insurance premiums are not allowed for tax purposes:

• Life insurance policies
• Plans providing coverage for loss of earning
• Insurance policies for loss of life and body injuries
• Insurance plans that guarantee payments for a period of time in case of hospitalization for sickness or injury
• Any part of a car insurance policy that provides medical coverage for all persons injured in car accidents
• Direct Premium payments for Health or long-term care insurance using before-tax dollar distributions from a retirement plan.

Medical Deduction on Taxes

Can Medical Expenses be Tax Deductible

Use IRS Form 1040 tax return to file your taxes and attach Schedule A (which is used to show adjustments to income, on the second page).

Filling Schedule A

• Report your total medical costs paid during that year on line 1.
• The Adjusted Gross Income (AGI) from your Form 1040 should be entered on line 2.
• Enter 7.5% of your AGI on line 3.
• The difference between your medical expenses and 7.5% of your AGI should be entered on line 4.
• The amount on line 4 will should be added to your other itemized deductions (entered on line 10) and deducted from your AGI to reduce your taxable income for that year.
• If the resultant amount is significantly less than the standard deduction, the rule of thumb is not to itemize.

 What are Qualified Medical Expenses for HAS

Payment for medical expenses using funds from a Health Savings Account (HSA) is not deductible because the money in the HAS is already tax-advantaged (Contributions to HSA are tax-deductible, the funds are left to grow tax-free and can be withdrawn tax-free to cater to qualified medical expenses).

Individuals can reimburse themselves for qualified medical expenses made out-of-pocket.

Generally, eligible expenses include;

• Hearing apparatus
• Psychological counseling
• Chiropractor costs
• Condoms
• Breast pumps
• Eyeglasses
• physiotherapy and
• Inpatient programs to help patients quit Smoking.
• Payment of premiums for Medicare, COBRA continuation coverage, receiving state or federal unemployment benefits, and eligible long-term care insurance.

Ineligible expenses include

• Vacations
• Vitamins
• maternity clothes
• funeral costs,
• child care for healthy babies,
• over-the-counter medicine, toothpaste, toiletries, cosmetics,
• swimming lessons and
• Elective cosmetic procedures.

Intentional or accidental consumption of HSA funds on unqualified attracts income tax.

Eligible Medical Expenses for FSA

Flexible Spending Accounts (FSA), sometimes called Flexible Spending Arrangement is an employer-based arrangement to help employees pay for many out-of-pocket medical expenses with tax-free dollars.

These funds are for a wide variety of health care products and services for ;

• the beneficiary,
• their spouse, and
• Dependents.

Eligible expenses include

• Insurance plan co-payments and deductibles,
• dental and orthodontia,
• Vision (eyeglasses and contact lenses)
• Qualified prescriptions
• Insulin and
• Medical devices

IRS requires the presentation of a detailed receipt together with a Letter of Medical Necessity, signed by your doctor. This helps verify the medical expenses and whether it’s a medically-necessary treatment for a known medical condition.

Please remember Credit card receipts, canceled checks, and balance forward statements do not meet the requirements for acceptable documentation.

Bottom Line

It’s advisable to seek the services of a tax professional to chart the best actions for the current situation. This is because deductions are complex and change from year to year.

Avoid these common mistakes:

Overlooking available deductions. Most people tend to miss claiming on deductions for pre paycheck Health insurance premiums and Medicare premiums withheld from Social Security.

Different rules for deductions. The 7.5% AGI threshold is not easy to meet. As much as you may not have enough expenses to get a federal tax deduction, make use of benefits at the state level, e.g. New Jersey allows unreimbursed medical expenses that exceed 2% of an individual’s income.

Poor recordkeeping. It’s not a requirement to send documentation when claiming medical deductions, however, you need to keep copies of all receipts and billing statements. You will need this to demonstrate itemization in case of an IRS audit.

Overlooking expenses. Alternative treatments like acupuncture, hotel stays during medical visits, special diets, etc are legible.