Claiming the medical expenses tax deduction

In a given year, relatively few Americans take advantage of the federal income tax deduction for unreimbursed medical expenses. But if an illness or hospitalization in the family has led to an abrupt rise in your out-of-pocket health care expenses, you may find you qualify for some relief at tax time. Beyond the usual remittances to physicians and hospitals, the IRS includes in its definition of “medical expenses” payments for a broad range of items and procedures, including medical equipment and supplies, orthodontia and dentures, home improvements to accommodate a person with disabilities, and a wide array of mental and physical therapy regimens.

To claim this itemized deduction, your total medical and dental expenses not reimbursed by insurance must add up to more than 10% of your adjusted gross income (AGI), and medical expenses are deductible only to the extent that they exceed this floor. You may deduct qualifying medical expenses incurred during the year by you, your spouse, or your dependents.

Qualifying expenses

The bar for taking the medical expenses deduction is high, but the list of potentially deductible expenses is so long that qualifying for this tax break may prove easier than you might expect. It is possible, for example, to include in your calculation payments for hospital services, most types of surgery, prescription drugs, lab work, blood sugar test kits, mental health services, and inpatient treatments for drug and alcohol addiction.

Also included in the IRS definition of medical expenses are items and procedures for which many people have limited or no insurance coverage, such as chiropractor and acupuncture treatments, smoking cessation programs, approved weight loss programs, laser eye surgery to correct myopia, fertility enhancement procedures, eyeglasses, and contact lenses. Provided the premium payments are made with after-tax dollars, you may also deduct the cost of most types of medical and long-term care insurance.

The medical expenses tax break can be especially useful for families with members who are elderly or disabled. You are permitted to include in the deduction calculation both nursing home fees and the cost of home health care services. Disability-related deductible items include braille books and magazines, guide dogs, hearing aids and batteries, wheelchairs, artificial limbs, crutches, and modification of a car to add hand controls or to create space for a wheelchair. If a child has been diagnosed with autism or a severe learning disability, parents may deduct tuition payments to a private school and the cost of specialized training or therapy. Also deductible are transportation costs incurred while traveling to and from medical treatments, including plane fares, ambulance services, and car mileage.

If you modify your home to make it more accessible for a handicapped family member, you may be able to claim many of the changes as capital expenses. Deductible home improvements include installing ramps, grading the exterior landscape to improve access to the house, moving or modifying electrical outlets and fixtures, widening doors and hallways, lowering kitchen and bathroom cabinets, and adding handrails or grab bars.

There are, on the other hand, certain expenses the IRS expressly does not allow, such as health club fees, cosmetic surgery, dancing and swimming lessons, housekeeping services, and over-the-counter drugs.

Recordkeeping requirements

As with all deductions of this kind, it is essential to keep receipts and other documentation to substantiate the expenses claimed. If you are uncertain as to whether you can take advantage of the deduction, maintaining good records will show you how close you are to exceeding the 10% floor. To improve your chances of qualifying, consider “bunching” your medical expenses or making as many of your health-related purchases as possible in a single tax year. For married couples who would not otherwise qualify, filing separately may allow the lower-income spouse to take advantage of the deduction.

FSAs and HSAs

In addition to the medical expenses deduction, the federal government offers several other options for minimizing the taxes owed on health care. If you anticipate running up substantial out-of-pocket medical costs in the coming year, find out if your employer offers a flexible spending account (FSA). To use an FSA, you must estimate in advance the total amount you will require to cover your medical expenses in the following tax year. An agreed-upon sum is then taken from each paycheck before taxation and deposited in your FSA. You can use these tax-free funds to pay for qualifying medical expenses.

Similarly, you may choose to make tax-deductible contributions to a health savings account (HSA). Unlike FSAs, HSAs are available to individuals regardless of employment status. The funds in an HSA grow tax-free, and withdrawals for qualified medical expenses are also free of taxes. But, because an HSA must be linked to a high-deductible insurance plan, it is usually not an attractive option for employees with access to more comprehensive group coverage or for people whose pre-existing health conditions would make it difficult for them to obtain insurance on the private market.

Taking full advantage of the available tax breaks on medical expenses usually involves a considerable amount of paperwork and some advance planning. But, with health care costs on the rise, the tax savings these deductions provide may well be worth the effort it takes to claim them.