Photo: Jasleen Kaur
With healthcare costs rising, and companies passing more of the burden onto employees, expect out-of-pocket medical expenses to continue ballooning. The good news is that there is a way to ease the pain if you are taking on a lot of expenses yourself. It’s time to check your bills and insurance claims to see what you spent this year, and how much of it came out of your own wallet. Whether you are covered by your employer or are one of the growing many who are opting to get individual coverage that is reimbursed by your employer, use these tips to see what deductions you may be able to take. You might be surprised.
Tip 1: Use the 7.5% Rule
If you took a pay cut last year or were unemployed temporarily, your lower income could qualify you for this even if you never qualified in the past. Taking a closer look at expenses will show if your lower income now meets the 7.5% rule.
Use this quick calculation to see what your expenses must be in order to qualify for the rule:
[YOUR GROSS ADJUSTED INCOME] x 0.075 = ____________________
Now Tips 2-10 will tell you what things to look for to help you determine if you meet the 7.5% rule. If you do spent 7.5% of your income on medical expenses, check to see if it’s more than the standard deductions. If not, you’re better off just deducting using the standard deduction.
Standard lump sum deductions are:
- -Single or filing separately if married: $5,700
- -Head of household with dependents: $8,400
- -Married and filing jointly: $11,400 (Add $1,100 for each spouse 65 or older)
- -Self-Employed: If you’re self-employed, then you can deduct 100% of the premium cost from your income. The 7.5% rule does not apply to you.
Tip 2: Visitors’ Rights
Whenever you get a service or treatment, the cost you pay out of pocket for that visit is deductible. This includes co-pays or what you have paid from your plan’s annual deductible (it’s deductible, get it?). Look for any of these services in your medical history to include:
- -Doctors visits, examinations, treatments
- -Dental visits
- -Eye exams
- -Lab fees
- -Hospital care
Tip 3: Medications
It’s nearly impossible to go through the year without having some medication prescribed to you. If you have a chronic condition, the cost to fill these can start to stack pretty high. Take an inventory of your prescriptions either on the explanation of benefits your insurer provides, or by contacting your pharmacy (or multiple, if you filled your meds at more than one company). What to include:
- -Birth Control pills
- -Over-the-counter drugs that a doctor has prescribed to you (NOT ones you bought without a prescription)
Do NOT include:
- -Over-the-counter drugs (such as aspirin or cold medication, even if a doctor recommends it. A recommendation is not necessarily a prescription The only exception: insulin)
- -Vitamins or supplements
- -Any medications you acquired from another country (e.g. Canada or Mexico)
Tip 4: Going the Distance
Travel to and from the doctor’s office or the hospital for treatment can rack up if you have frequent health treatments…or accident-prone children. The good news is that you can take 16.5 cents per mile driven for each medical visit. Didn’t record your mileage at the time? Calculate the miles by using Google maps, then apply this distance for each office visit. If you took public transportation, include the fare instead. If there are parking fees, which many hospitals now impose, you can deduct those as well, and don’t forget to include any tolls you paid along the way to or from these visits. Airfare to another city if seeking medical services, including up to $50 per night for lodging, is also a medical tax deduction. This does not include days you take for vacation or pleasure on this trip, but nice try.
- -Calculate 16.5 cents per mile (rate for 2010 taxes)
- -Parking and tolls
- -Airfare/bus fare
- -Up to $50 per night lodging for trips required for treatment
Tip 5: Eye of the Beholder
While visits to your eye doctor may be a more obvious health care tax deduction, many other costs associated with taking care of your eyes are also tax deductible. If you have a vision problem, or have worn either contacts or glasses, for a while, this is good for you. Look for the following eye health-related items to deduct:
- -Contact Lenses, including maintenance such as saline solution and enzyme cleaner
- -Laser eye surgery
- -Radial keratotomy
Tip 6: Dental Deductions
Believe it or not, any time you seek dental treatment, whether you are simply getting a cleaning or undergoing a more advanced dental surgery, you can add these to your tax-deductible expenses list. Things to look for:
- -Artificial teeth (Veneers and dentures can be a grey area, and can often only be included if it necessary to improve a deformity related to disease or treat a condition, and may require a diagnosis. It would be best to call the IRS at 1-800-829-1040 to walk through your particular situation to determine if these qualify)
Because simply having teeth is not a condition, everyday care items such as toothbrushes, paste, floss, and mouthwash are NOT to be included in your health-related tax deductions.
Tip 7: Alternative treatments
Sometimes traditional medical treatment doesn’t do the trick for specific conditions. If you are seeking any of these treatments as an alternative or supplement to treat a medical condition, then you may deduct these health related costs.
- -Acupuncture for medical reasons
- -Chiropractic treatment for medical reasons
- -Psychologists, psychoanalysis, and psychiatric care
- -Christian Science Practitioner
Some treatments such as going to therapy or to an acupuncturist can also be a grey area. These can be a medical care expenses only if it is to treat a diagnosed condition, and must be prescribed treatment rather than simply a doctor’s recommendation. For these situations, it would be best to call the IRS to determine if these qualify.
Tip 8: Medical Equipment
Some conditions require additional help beyond a doctor or medication, and involve purchasing support equipment. These, including equipment added to a home or vehicle, are also health care expenses that can be tax deductible.
While this is by no means an exhaustive list, here are just some examples of what is deductible:
- -Hearing Aids
- -Blood/glucose monitor
- -Artificial Limbs, prosthetics
- -Guide dog or other service animal (buying, training and maintaining)
Tip 9: Premiums
This one can be a little bit tricky. There are certain limitations that should be followed. If you are employed and your employer sponsors your health insurance, then only include medical and dental premiums if they are included in Box 1 of your Form W-2. If not, your premiums are already taken from your salary pre-tax, and therefore cannot be deducted.
Now if you are self-employed, 100% of your premiums are tax-deductible and for the first time for the 2010 tax season, so are Medicare contributions, as we previously mentioned.
Premiums can be included for policies that cover:
- -Hospitalization, surgery, x-rays
- -Prescription coverage
- -Dental coverage
- -Prepaid Insurance premiums
Do NOT include policies for:
- -Life insurance
- -Policies for payment in place of lost earnings,
- -Policies for loss of life or dismemberment
- -Supplemental insurance (e.g. medigap)
Tip 10: Baby? Baby! No-baby.
Pay attention, ladies…and men. Whether you are planning for a pregnancy, or trying to prevent one, the costs associated with your efforts can be a medical tax deduction, including:
- -Pregnancy test kits
- -Birth control pills
- -In-vitro fertilization (including the cost of storage for both egg and sperm)
- -Sterilization such as vasectomy or tubal ligation (aka “getting tubes tied”)
- -Surgery to reverse sterilization
- -Midwife for delivery (If they are a registered nurse, they would be categorized in the medical service category, and if not, they could still fall under nursing services.)
Tip 11: Repeat for Dependents
Now that you have done this for yourself, use the same checklists to tally up related costs for your dependents and spouse. If you paid for medical expenses for a family member that does not qualify as your dependent (e.g. adult child, or elderly parent), you may be able to deduct those medical expenses. Something new for 2010 filings: you can deduct medical expenses paid for your child up to age 27, even if they no longer qualify as a dependent, nor are covered by your health plan.
(And for future planning, try to bunch elective medical procedures into years that you’ll qualify for a medical deduction.)
Now, here is a tricky part. If you are sharing the cost of a loved one with others, use caution. You may only write off the medical expenses that you pay directly. Say, if your brother pays for your mom’s expenses in full and you reimburse him later, you cannot write that payment off. Also, your brother couldn’t write off the whole expense, only the portion he was not reimbursed for. So he wasn’t being sneaky and trying to get the full write off, but you aren’t getting the tax deduction you could be. Plan carefully.
Speaking of planning, when it comes to elective procedures (a knee surgery, for example), try to bundle all of them for your family into one tax year so you qualify for the deductions, assuming your cash flow allows you to do this.
What you can NOT deduct:
Just because something is good for you, doesn’t mean it can be tax deductible. While a gym membership will help you get in shape (in theory) and a vacation might improve your mental health, unless you have a prescription for these, they are not a medical tax deduction for you. You should keep the following off your returns unless you meet the exceptions:
- -HSA-, FSA-paid services (Health Savings Account, Flexible Spending Account). FSAs are contributions that are already pre-tax, and HSAs are deducted separately. Use IRS Publication 969 for reference
- -General health-related vitamins or supplements, etc., unless with a doctor’s prescription
- -Over-the-counter drugs (such as aspirin or cold medication, even if a doctor recommends it. The only exception: insulin)
- -Everyday personal use items unless used for an illness (you can’t write off your toothbrush)
- -Gym or spa memberships
- -Weight loss programs (unless prescribed to treat a diagnosed condition such as obesity)
- -Vacations (even if it would improve your general wellbeing)
- -Cosmetic surgery (unless to repair a deformity caused by a condition or accident)
- -Teeth whitening
- -Hair transplant, or hair removal
- -Babysitters, childcare, or diaper service for a healthy child
- -Medical marijuana or other controlled substance (your state may allow it, but it’s still a federal violation. Don’t go there.)
Now that you have itemized your medical expenses using tips #2-11, go back to the first tip to see if the itemized deductions you just calculated are at least 7.5% of your adjusted gross income AND are more than the standard lump sum deduction you would qualify for. If the itemized deductions are ONLY 7.5% of your income but NOT higher than the standard lump sum, you are better off taking the standard deduction.
This list is by no means exhaustive, so find more scenarios and details on additional tax deductions at IRS publication 502. It is always best to seek the advice of a CPA when dealing with complex tax situations, so do forward this article to yours to start the conversation and to avoid potential misinformation.