Sick! Can I Deduct That? Deductible Medical Expenses

Taxes 101

Fact one: numerous medical expenses are deductible.  Fact two: Many people have medical expenses. Yet many medical expenses are never deducted. The cause of the apparent inconsistency?  Significant limitations on deductible medical expenses.

Can I Deduct My Medical Expenses?

You can deduct your medical expenses only if they are relatively high in relation to your income.  If the total of your medical expenses is less than 7.5% of your adjusted gross income (AGI), you are not eligible to take a single dollar’s worth of the medical expense deduction.  Furthermore, if your medical expenses do exceed the 7.5% threshold, they are only deductible to the extent they do so.

Let’s take an example.  Say your AGI is $50,000.  If you had $3,000 of medical expenses, none would be deductible, since $3,000 is less than 7.5% of your AGI (0.075 x $50,000 = $3,750 > $3,000). If instead you had $5,000 in medical expenses, you would be able to deduct $1,250 of them (since $5,000 exceeds the 7.5% threshold, or $3,750, by $1,250).

Maybe. Perhaps you still might not be able to deduct those expenses.

Even if your medical expenses are so significant they exceed the 7.5% hurdle, you must itemize on your tax return to be able to deduct any of your medical expenses. In other words, the total of your itemized deductions (including but not limited to your state income taxes, charitable contributions, mortgage interest paid, property taxes paid, and, of course, the deductible portion of your medical expenses) must exceed your standard deduction.  A single individual’s standard deduction for the 2010 tax year is $5,700. For a married couple filing jointly, the number is $11,400.  If the total of your itemized deductions is smaller than the relevant standard deduction, you will not benefit from a potential medical expense deduction.

What Medical Expenses Are Deductible?

If you have a reasonable chance of your medical expenses exceeding the levels described, it’s time to consider what types of medical expenses the IRS allows you to deduct. At a high level, it’s actually quite simple: if the medical expense relates to the prevention or treatment of a physical or mental illness, it’s deductible.  If the expense is related to a cosmetic procedure it’s not deductible.

Specific deductible medical expenses include payments you make to doctors, dentists, and, psychologists. Your annual eye doctor visit is deductible too (Isn’t it about time?) Go to the hospital? Deductible.  Go to a nursing home? Deductible.  Go to Subway because it’s healthier than McDonald’s?  Not deductible.  The whole thing is pretty logical, and the IRS offers plenty of additional information. Basically, If you itemize your medical deductions, you can deduct medical and dental expenses if they are paid as prevention, mitigation, diagnosis, or cure of a physical or mental illness.

Keep in mind any reimbursement reduces your deductible expense. Imagine you go to the doctor. Say the normal bill is $100 but your co-pay is only $20. Your deductible expense is limited to the amount you actually paid, or $20.

Another example: let’s say you have a dental procedure and you must lay out $200 on that day while the dentist verifies your coverage. Later on, you receive a reimbursement check from your dental insurance of $125.  Your deduction for that dental visit is $75 – the amount you were ultimately out of pocket.

One final important deductible medical expense: heath insurance premiums. Make sure you include those in your calculations too. But if you pay your medical expenses via paycheck withholding, you can’t deduct them. Although that restrictions might not seem fair, it is. The reason you can’t deduct those expenses is because you already did – the premiums reduced your taxable income at the time you paid the premiums. So, who can benefit from deducting health insurance premiums?  Primarily those who purchase it privately and those who are self-employed.

As if you needed another reason to stay healthy!