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.