Tax Tip: Medical Expense Deductions

I know you have been told, “forget about keeping track of medical expenses, you have to have too many expenses for it to matter”. If you ask the question is that always true, the answer is no. Yes, they are right if you do not itemize your deductions. They are also probably right if you really have very minimal medical expenses. If you do however itemize your deductions, keeping track of your medical expenses could give your itemized deduction total a boost.

In all things numbers, folks often underestimate amounts that are not written down.

The reason that we are often told to forget about tracking medical expenses, is that, the only medical expenses that come into play for your itemized deduction calculation, are those expenses that exceed your adjusted gross income by 7 ½ %, so let’s say that your income totals $102,400 (for ease of calculation) and that income was adjusted down by a $2000 tuition deduction, and $400 in student loan interest so your adjusted gross income is now $100,000, you would have to have qualified medical expenses of over $7,500 for them to matter in the itemized deduction calculation and then only the amounts over $7,500 (7 ½%) will qualify.

$102,400 – ($2,400) = $100,000 x .075 = $7,500

Income – adjustments = adjusted gross income times 7 ½% = your 7 ½% number (limit)

So if you had $10,000 in qualified expenses then only $2,500 would apply towards the medical expense component of your itemized deductions amount.

$10,000 - $7,500 = $2500

Total qualified medical expenses - your 7 ½% number = qualified deductible medical expenses

Now, you say, well, I don’t have over $7,500 in expenses – remember that you really can only determine what your 7 ½% number is based on your income and your adjustments to income which is why keeping track of your expenses is important.

If the above example had an income of $52,400, with the same adjustments, your adjusted gross income would be $50,000 – then your 7 ½% number would be $3,750.

$52,400 – ($2,400) = $50,000 x .075 = $3,750

Income – adjustments = adjusted gross income times 7 ½% = your 7 ½% number (limit)

If you do not have many medical expenses, that’s a good thing. No one wants to be sick in order to take a tax deduction; however, if you do have those expenses, you want to be sure that you have used them all to decrease your tax liability.

If you have young children, you may have larger than average co-pay amounts, prescription amounts, and possibly surgery or procedure amounts.

If you are more mature, you may have more diagnostic procedures, surgical expenses, or medication expenses.

If you have a chronic illness, you may have high prescription amounts.

Qualified dental and optical expenses also qualify for medical expenses and folks often forget that.  

If you are having a year where your medical expenses are already somewhat high but you probably haven’t exceeded your 7 ½% number, and you are scheduled for surgery or other procedure at the beginning of the next year, you may want to try to bring your surgery into the end of the current year so that your expenses are accumulated in one year pushing you over that 7 ½% limit, allowing you to take advantage of the tax benefits. Similarly, if you have an expensive or procedure surgery scheduled for the end of the year, and you know that you or your family may have some significant health expenses in the following year, you may want to delay the procedure or surgery to the beginning of the next year.

Caveat: You must have a discussion with your physician to make sure that pulling in or pushing out the date of your surgery or procedure doesn’t compromise your health.

A lot of people are not aware that medical mileage qualify as a medical expense (these are the miles you drive to medical facilities, including pharmacies).

Keeping track of all your medical expenses, will enable you to have the data to determine whether you qualify to include your medical expenses in your itemized deductions and of course is evidence in case of an audit.

You should also check with your human resources department, whether or not your health insurance premiums are deducted from your paycheck before or after taxes. If they are paid after taxes, then they also qualify as a part of your medical expense deduction. Make sure to let your tax advisor know that. Having some documentation from your HR department, or information from your company manual, will protect you in case of an audit. Many companies use income before taxes for employee’s premiums (which means that in that case you already got your tax break).

Important Note: The expenses that qualify are out of pocket expenses, so any portion of your medical costs that's paid for by your insurance company, does not qualify to be included on your tax return.

Stay well.