A Guide to Medical Tax Deductions
Knowing what to take off your taxes can save you a bundle.
Are you fearing pain in your pocketbook this tax season? You may be able to recoup costs with medical tax deductions. To cash in you must meet two criteria: You must itemize on your tax return and your out-of-pocket medical expenses – those not covered by insurance – must total more than 7.5 percent of your adjusted gross income (AGI). For example: If your AGI is $50,000 for the year, you may deduct any out-of-pocket costs in excess of $3,750.
Use these tips to maximize your medical tax deductions.
- Know what’s deductible. Generally, for medical expenses to qualify as deductions they must be ordered by a health professional to treat a diagnosed condition. This includes fees for doctors, hospitals, nursing services, physical and occupational therapy, lab work, surgery, and transportation costs, including a per-mile deduction or the actual cost of operating your own car to get to and from medical appointments. An exception: Over-the-counter meds (except insulin) are not deductible.
- Remember insurance premiums. Medical and hospitalization insurance premiums you pay for yourself (not premiums paid by your employer), including Medicare Part D premiums. An exception: the portion of your automobile insurance that covers medical payments due to an accident.
- Know who’s covered – and when. If you have a spouse (and file jointly), children and/or other dependents, remember you can combine all of your medical expenses to reach the 7.5 percent threshold. You must deduct expenses in the calendar year you pay for them – regardless of when you receive the services. For example, if you had a procedure in December 2011 and paid your bill the following January, you can deduct it from your 2012 taxes. Similarly, if you buy a three month supply of medication in December 2012, you can deduct it from your 2012 taxes, even if you will not start the medication until 2013.
- Evaluate special items. Personal items, such as orthotic shoes, must pass the “but for” test, says IRS spokesperson Michelle Lamishaw, “which means that the taxpayer would not purchase the item but for the medical purpose.” In some cases, only part of the cost can be written off. A home modification may also be deductible, but if it increases your home’s value, such as an elevator, you must discount that increase.
- Check alternative therapies. Alternative treatments, such as acupuncture, are allowed, but supplements are not – unless ordered by a doctor. And although cosmetic surgery typically isn’t deductible, it is when it’s to correct deformities or repair injuries resulting from an accident or disease.
- Include dental. Dental expenses, including fillings, dentures and dental insurance premiums can all be deducted, after you meet the 7.5 percent threshold.
- Get your doctor’s orders in writing. It won’t guarantee a deduction will pass muster with the IRS, but it strengthens your case.
- Bundle your costs. Consolidating medical expenses into one year instead of two makes that 7.5 percent threshold more accessible, says Tony Davis, a CPA with LarsonAllen in Minneapolis who specializes in health care.
For a complete list of deductible medical expenses, check out the IRS Publication 17, Your Federal Income Tax, available online.