How the Deduction for Medical Expenses Works

Did you have a rough year, medically? Dealing with health issues is awful, but there may be a silver lining on your taxes. You can deduct your medical expenses on your personal tax return if you meet certain requirements.

You Have to Have a Lot of Medical Expenses before it Becomes Worthwhile

While the threshold for deducting medical expenses used to be 10% of your AGI (that is, your income after certain other deductions), it was recently brought down to 7.5%. This is good news for people with medical conditions!

Remember, your AGI is not your total income. It is your income after certain special deductions (called Above the Line Deductions) get taken out. Examples of these are student loan interest, contributions to some retirement accounts, and some others.

Medical expenses are an itemized, or "below the line" deduction. This means that you have to choose between taking a standard deduction, which everyone can get, and taking the sum of your itemized deductions, such as medical expenses and charitable deductions. Is this confusing? Check out the Infographic: How Taxes Work and it will all make sense.

What this means is that even if you are over the 7.5% threshold, you might not want to take your medical expenses as a deduction. If you have fewer itemized deductions than the amount of the standard deduction ($6350 for single folks in 2017), it does not make sense to take a deduction.

Here's an example:

  • You're filing as single.
  • Your AGI was $40,000.
  • You had $5,000 in medical expenses.
  • You had no other itemized expenses such as charitable donations or mortgage interest.

You're above the threshold to be allowed to deduct, but deducting your medical expenses would not help you. Why? $6,350 is higher than $5,000. Why take a $5,000 deduction when you can take a $6,350 one?

How the new tax bill effects medical deductions: When the new tax bill goes into effect for tax year 2018, the standard deduction is going up to $12000 for single people. That means that although they are keeping medical deductions around, if you had under $12,000 of medical expenses, charitable donations, and other below-the-line deductions, you're better off taking the standard deduction instead.

Limitations on Medical Deductions

Let's say you had so many medical expenses this year that:
A. Your medical expenses are over 7.5% of your AGI
B. Your total itemizable deductions are over the amount of the standard deduction

So it does make sense to deduct your medical bills. But what rules do you have to follow?

You Had to be the One Paying

If someone else, such as an insurer or family member, paid your medical bills for you, you may not deduct those amounts from your taxable income.

So what can you deduct?

Very generally speaking, the IRS is OK with the deduction as long as it is a payment for "for the diagnosis, cure, mitigation, treatment, or prevention of a disease, or payment for treatments affecting any structure or function of the body". (Source: Tax Topic #503)

This includes:

  • Payments of fees to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists and nontraditional medical practitioners
  • Acupuncture treatments
  • Inpatient treatment at a center for alcohol or drug addiction
  • Participation in a smoking cessation program and for prescription drugs to alleviate nicotine withdrawal
  • Payments for insulin and drugs that require a prescription
  • Payments for admission and transportation to a medical conference relating to a chronic disease that you, your spouse, or your dependents have (if the costs are primarily for and essential to necessary medical care)... note that this does not include food and lodging while you are at the conference, though!
  • Payments for false teeth, reading, prescription eyeglasses or contact lenses, hearing aids, crutches, wheelchairs, and for a guide dog or service animal to assist a visually impaired or hearing disabled person, or a person with other physical disabilities
  • Payments for transportation to medical care
  • Payments for insurance premiums you paid for policies that cover medical care. However, there are rules about this: check carefully on Tax Topics 502 to see if you can really deduct your insurance premiums.
  • A portion of nursing home and assisted living expenses (they will usually send a letter stating the deductible percentage)

As you can see, there's a lot you can deduct! This is only a partial list.

What can't I deduct as a medical expense?

Things you do for your general health (rather than treating a specific disease) and non-prescription medications are the biggest non-allowable medical expenses. So no, you can't deduct your "retail therapy", a bottle of Advil, or your emotional support animal.

Here are some specific medical deductions disallowed by the IRS:
  • Health club and gym dues (in most instances)
  • Over the counter medicines like advil, aleve and aspirin 
  • Toothpaste
  • Toiletries
  • Cosmetics and Cosmetic Surgeries
  • Trips or programs for general health improvement
  • Nicotine gum or patches that do not require a prescription

Still unsure about whether you can deduct your medical expenses? Check out the IRS's Interactive Tax Assistant! It will walk you through the process.

Deducting medical bills can have a powerful financial impact on sick folks who are already financially stressed. Make sure you have a talk with your CPA or tax adviser if you had a lot of medical bills during the year. They can help you come up with a strategy. It might not make you any healthier, but it could alleviate some of the financial sting!

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