Tax deductions are a great way to minimize your annual tax bill, but finding all the exemptions you're eligible for can seem daunting. This article will explain how to report tax deductions for medical expenses. If you've had costly medical bills, there's a good chance you can deduct some portion of them.
First, it's important to understand how tax deductions work in general. A tax deduction simply reduces the amount of your income that you're taxed for. In other words, if you earned $40,000 and had $2,000 in medical expenses that you're able to deduct, you're only taxed for $38,000 in income. It's as if you never even earned that $2,000.
To deduct your medical expenses, you typically have to meet three criteria. You have to itemize your tax return, which means listing each deduction and its amount instead of taking the standard deduction (it also uses a different tax form). Your medical expenses must also exceed 10 percent of your adjusted gross income (AGI) -- we'll explain this in a lot more detail shortly. Finally, you can't have paid for your medical expenses through an account that's already untaxed, like a health savings account (HSA) or flexible savings account (FSA). Earnings that are diverted into those accounts avoid taxes to begin with, so deducting medical expenses paid through them would be like getting a double deduction.
Read on to find out what types of medical expenses you can deduct, including some you might not expect. We'll also figure out how to calculate your AGI and talk about medical expenses that can't be deducted.
Calculating Adjusted Gross Income
The adjusted gross income threshold is the most complicated part of medical tax deductions, so let's cover that first. AGI is your total income from the year minus certain tax deductions, sometimes known as adjustments. These adjustments include things like alimony payments, contributions to certain retirement funds, tuition expenses and a few others. Itemized deductions like work expenses, mortgage interest and medical expenses are not subtracted from your income to calculate your AGI -- those deductions come later. To be clear: Your AGI is calculated before you deduct medical expenses, and medical expense deductions do not affect your AGI.
As we mentioned, you can only deduct the portion of your medical expenses that are above 10 percent of your AGI. The threshold was 7.5 percent before 2013, and if you're 65 or older, you can still use 7.5 percent until 2016. We're going to use the 10 percent threshold for our examples, so if you qualify for the 7.5 percent exception, adjust your calculations accordingly.
Here's a simple example: Your income for the year, minus adjustments, is $50,000. That's your AGI. Your medical expenses that year were $6,000. First, calculate 10 percent of your AGI -- 10 percent of $50,000 is $5,000. That's your threshold for medical expense deductions. Now figure out what portion of your medical expenses exceeds the threshold. With expenses of $6,000 and a threshold of $5,000, that leaves $1,000 in medical expenses above the threshold. When you file your itemized return, you'll be able to deduct that $1,000 from your income. That's $1,000 you won't be paying any taxes on!
If your medical expenses for the year were only $3,000, none of that amount exceeds the threshold, so you won't be able to deduct any medical expenses.
In the next section, we'll take a look at itemizing your return, and we'll point out certain medical expenses that can't be deducted.
Itemized Returns and Ineligible Medical Expenses
The idea of filing an itemized tax return can seem intimidating, but it isn't really that difficult -- it just requires keeping better records of your expenses throughout the year. Ideally, each year you should itemize your taxes, then check against the standard deduction (which varies depending on whether you're single, married, filing jointly or separately, and so on) and see which one gives you the biggest tax savings.
If you want to deduct your medical expenses, you'll have to itemize, so here's a quick look at how: gather your records for the year, including mortgage interest statement, receipts for medical and business expenses, charitable donations, real estate taxes, and more (it's a long list beyond the scope of this article). Then, get a Form 1040 and a Schedule A, or select the appropriate options on your tax software of choice. This is different from the standard deduction, which uses the 1040A or 1040EZ forms. So, aside from some extra record-keeping and a different form, itemized taxes aren't so bad.
Now you want to start adding up all the medical expenses for the year to see if you pass the threshold. There's a short list of expenses that do not qualify. We've already mentioned expenses paid from a tax-free account like an HSA. You also can't deduct expenses that were paid for or reimbursed by your insurance. Cosmetic procedures are not allowed either.
Finally, you can't deduct expenses you didn't pay for this year. In other words, if you had surgery in September 2014, were billed for it in December 2014, but paid the bill in January 2015, that's a deduction for your 2015 tax bill.
So what can you deduct? It might be easier to hit the AGI 10 percent threshold than you think. We'll explain how next.
Medical Expenses You Can Deduct
You can deduct any medical or dental expenses that you paid for out of your own pocket. This includes medical services for yourself, your spouse, your kids or other dependents. This encompasses "diagnosing, treating, easing or preventing disease," according to the IRS. The cost of prescription drugs is deductible. Any premiums you pay for medical insurance policies are deductible, including long-term care -- if you pay for your own insurance, this is probably what will get you to that AGI threshold. If you're self-employed, you can deduct your insurance premiums under certain circumstances, even if you don't do an itemized return. This deduction actually reduces your AGI, so it works a little differently than the usual medical deduction.
If you had an emergency and were transported in an ambulance, the ambulance cost is deductible. If you have to travel for medical care, such as to a special clinic or a hospital that specializes in your particular medical problem, you can deduct the cost of travel. Even if you just have to drive back and forth to the hospital a lot in your own car, there's a standard mileage deduction of 23.5 cents per mile (for 2014). You can track your actual gas and maintenance costs, but it's usually a lot easier and beneficial to use the standard mileage deduction.
There are some other expenses that can be deducted that you might not expect. If you attend a conference about a chronic condition you or a family member suffers from, travel and conference expenses are deductible (but not lodging and food). Surgery to correct vision problems, eyeglasses, hearing aids and other medical devices (even guide dogs and other assistance animals), and drug and alcohol abuse treatments also fall under allowable tax deductions.
If you need to modify your home in some way because of a medical condition (like a ramp because you can't use stairs or a humidifier to ease asthma), the cost of those home improvements can be counted as medical tax deductions. The catch is that your doctor has to declare that the improvement is necessary. If the modification significantly increases the value of your home, that portion of the expense would not be deductible -- you'd need to talk to a tax expert to determine this case by case.
You can deduct the cost of a weight-loss program, but only if a doctor has declared it a medical necessity that you lose weight. In fact, if your doctor does so, you can deduct the cost of some diet foods and health club dues (which are not ordinarily deductible expenses).
Dealing with addiction is also usually covered, including treatment at an addiction center, smoking cessation programs and nicotine withdrawal treatments that require a prescription.
You can see that, although the AGI threshold makes it difficult to deduct medical expenses if you've earned a lot, many of those expenses add up quickly, especially if you're paying your own insurance premiums. With some careful record-keeping, you can take some of the sting out of the year's medical costs when it's tax time.
Author's Note: How to Report Tax Deductions for Medical Expenses
I spend a lot of time writing about things like dragons and video games and supercars, but surprisingly (to myself, at least), I really enjoy these seemingly dry topics. Maybe it's because there's a chance they'll really help someone understand a daunting topic (and save a few bucks). Maybe it's just nice to come back to Earth now and then. I found this one pretty interesting -- who knew you could deduct home improvements as a medical expense? My sincere hope is that readers never have any interest in this article because they're always healthy and well-insured.
- Bell, Kay. "Maximizing your medical deductions." Bankrate.com. March 10, 2014. (Nov. 19, 2014) http://www.bankrate.com/finance/money-guides/maximizing-your-medical-deductions-2.aspx
- Erb, Kelly Phillips. "Deduct This: The History of the Medical Expenses Deduction." Forbes. June 20, 2011. (Nov. 20, 2014) http://www.forbes.com/sites/kellyphillipserb/2011/06/20/deduct-this-the-history-of-the-medical-expenses-deduction/
- Internal Revenue Service (IRS). "Deducting Medical and Dental Expenses." Feb. 26, 2014. (Nov. 20, 2014) http://www.irs.gov/uac/Newsroom/Deducting-Medical-and-Dental-Expenses
- Internal Revenue Service (IRS). "Itemizing vs. Standard Deduction: Six Tips to Help You Choose." March 10, 2014. (Nov. 20, 2014) http://www.irs.gov/uac/Newsroom/Itemizing-vs-Standard-Deduction-Six-Tips-to-Help-You-Choose
- Internal Revenue Service (IRS). "Topic 502 - Medical and Dental Expenses." Aug. 19, 2014. (Nov. 20, 2014) http://www.irs.gov/taxtopics/tc502.html
- Kennan, Mark. "Does Property Tax and Mortgage Interest Drop Your AGI Dollar for Dollar?" Zacks. (Nov. 20, 2014) http://finance.zacks.com/property-tax-mortgage-interest-drop-agi-dollar-dollar-1300.html