Medical expenses, especially from unexpected emergencies, can take a serious chunk of your household budget and income. Fortunately, the Internal Revenue Service gives you some relief by making some of these medical expenses deductible on your tax return. However, you need to understand which medical and dental expenses are deductible and how you can take advantage of this tax deduction.
We explain how to use IRS Publication 502 to calculate your medical deductions and give you guidance on which expenses are deductible and which are not.
How to Claim the Medical Expenses Deduction
Medical and health care expenses are only deductible in the year you pay them. You must itemize your deductions to claim a medical expenses deduction. This means that you cannot take the standard deduction. Therefore, you can only claim a medical expenses deduction when your total itemized deductions are greater than the standard deduction.
These are the steps to follow if you itemize. You have to use Form 1040 and attach Schedule A.
- Enter the total medical expenses that you paid during the year on line 1 of Schedule A.
- Enter your adjusted gross income from Form 1040 on line 2.
- Calculate 7.5 percent of your adjusted gross income and enter on line 3.
- Take the difference between your total medical expenses and 7.5 percent of adjusted gross income and enter on line 4.
If this excess of medical expenses above the 7.5 percent threshold plus your other itemized expenses is greater than the standard deduction, you should itemize. If this total figure for deductions is less than the standard deduction, you would not itemize.
How to Calculate the Medical and Dental Expense Deduction
You can only deduct the unreimbursed medical expenses that exceed 7.5 percent of adjusted gross income as reported on your income tax return Form 1040.
Let’s take an example. Suppose you have an adjusted gross income of $50,000. Your medical expenses would have to add up to more than $3,750 ($50,000 X .075) before you could start taking any deductions. And then, you could only deduct the amount above $3,750.
Now suppose you had the following deductions:
- Medical expenses - $5,000
- Mortgage interest - $4,000
- Charitable contributions - $3,000
Because of the 7.5 percent threshold, you can only deduct $1,250 in medical expenses ($5,000 minus $3,750). Your total itemized deductions would add up to $8,250 ($1,250 + $4,000 + $3,000).
In this example, if you are filing as a single taxpayer, you would not itemize your deductions because the standard deduction of $12,200 for taxpayers in year 2019 is greater than your itemized deductions of $8,250. Since you can’t itemize, you lose the medical deduction.
What Medical Expenses Are Deductible?
The list of deductible medical expenses is quite lengthy. You can refer to IRS Publication 502 for a full list.
Here are a few examples of medical and dental expenses that are deductible:
- Insurance premiums - Premiums for health and dental care including premiums for qualified long-term care
- Prescription medicines - Ordered by doctors, including insulin
- Medical examinations and tests - For example, blood sugar levels and other laboratory tests, X-rays, full-body scans, pregnancy tests
- Hospital care - Lodging, meals, clinic expenses, laboratory fees, prescription drugs
- Part B and Part D of Medicare insurance - Persons on Medicare should not overlook this one.
- Stop smoking programs - Program costs and prescription drugs to aid nicotine withdrawal
- Medical aids - Hearing aids, wheelchairs, guide dogs, eyeglasses, braces, crutches and contact lenses
- Vision surgery - Laser eye surgery or radial keratotomy
- Lodging - Hotel costs if away from home for medical care in a hospital or medical care facility
- Transportation - Costs of transportation by bus, train, taxi or airplane
- Ambulance service - Travel costs to receive medical care
- Artificial teeth
- Birth control pills - When prescribed by a doctor
- Fertility enhancement - Includes in-vitro fertilization and surgery related to increasing fertility
- Alternative treatments - Acupuncturists
Read More: Are a Prior Year's Medical Bills Tax Deductible?
What Medical Expenses Are Not Deductible?
While the list of deductible medical expenses is long, many expenses that may be beneficial to your health and might help you avoid future health problems are not deductible. Some more obvious nondeductible medical expenses are:
- Over-the-counter medicines
- Gym memberships
- Nutritional supplements
- Diet foods
- Nicotine gum or patches
How Do You Handle Reimbursements?
If you pay some out-of-pocket medical expenses and your insurance company later reimburses you, then you must reduce your total medical expenses for the year by the amount of these reimbursements. This would also include any Medicare payments.
Even if your insurance company only reimburses you for a few specific expenses out of the total bill, you must still deduct these reimbursements from your total medical expenses.
Health Insurance for Self-Employed Persons
Self-employed persons can deduct 100 percent of medical insurance premiums plus premiums for age-based long-term care coverage as adjustments to income instead of as an itemized deduction. A self-employed person does not have to itemize deductions in order to take this adjustment to income. Medical expenses in addition to insurance premiums must be reported on Schedule A.
Medical insurance premiums for self-employed persons are recorded on line 16 of Schedule 1. This figure plus any other adjustments to income are recorded on line 8a of Form 1040.
Self-employed persons cannot claim a deduction for health insurance premiums if they or their spouses were eligible to take part in a health plan subsidized by an employer.
The deduction for health insurance premiums cannot exceed the earned income from the business. For example, if the business of the sole proprietorship reported an income of $8,000, but the insurance premiums were $11,000, the adjustment to income would be limited to $8,000. If the business reported a loss, then a deduction could not be claimed because the business must have profits to offset the expenses.
What Is a Flexible Spending Account?
If you have health insurance provided by your employer, you can set up a Flexible Spending Account (FSA) to pay out-of-pocket costs for copayments and deductibles. FSAs can be used in conjunction with unreimbursed and deductible medical expenses allowed by Publication 502.
You can have a certain amount deducted pretax from your paycheck to add to an FSA. Employers can also make contributions to your FSA, but they are not required by law.
You withdraw funds from your FSA by submitting a claim to the FSA administrator with documentation of medical expenses and a statement that the expense was not covered by your regular health insurance plan. If approved, the FSA administrator will reimburse you for your cost.
You can contribute up to $2,750 per year. Funds can be used to pay medical expenses that are generally the same as authorized in IRS Publication 502.
Money in an FSA account is a use-it-or-lose-it situation. Funds left in the account at the end of the year are forfeited. However, an FSA has two options: one that allows a grace period of two and a half months to use up the funds in the account and another that lets you carry $500 over into the next year.
What Is a Health Savings Account?
A Health Savings Account is a special personal account that can be used for qualified healthcare expenses. However, participants must be enrolled in a high-deductible health plan (HDHP) in order to open an HSA. An HDHP is defined as a health plan for an individual with a minimum annual deductible of $1,350 and a maximum annual deductible and other out-of-pocket costs of $6,750.
Contributions are limited to $3,550 per year in pretax dollars made by payroll deductions through your employer. They are not included in your gross income on your tax return.
Interest and other earnings on the HSA account accrue tax-free. Distributions from an HSA for qualified medical expenses are also tax-free.
Any funds left in your HSA account at the end of the year can be rolled over into the next year. In this sense, an HSA is more flexible than an FSA.
You can take your HSA account with you if you change employers.
HSAs offer you the convenience of a debit card that you can use to pay for medical expenses and prescription drugs. You can even use a debit card to repay yourself if you paid medical expenses with another account, like your regular checking account.
Refer to IRS Publication 969 for more details about health savings accounts.
What Is a Health Reimbursement Arrangement?
A health reimbursement arrangement (HRA) is a plan funded by an employer that reimburses employees for qualified medical care expenses. The reimbursements are deductions for the employer, but they are not included in the employee’s income; they are tax-free.
The employer adds funds to the plan, and the employees request reimbursements for expenses they have already paid.
An HRA pays for expenses up to a maximum dollar amount for specific coverages as defined by the plan. Employees have to pay for the medical expense first, then get their money back from the HRA. Funds can be used to cover medical expenses for their spouses and dependents.
Qualified medical expenses generally follow the rules as outlined by IRS Publication 502. However, the employer has the right to exclude certain medical expenses, even if they are accepted by the IRS. The employer's HRA plan documents the list of reimbursable medical expenses.
HRAs are not portable. An employee would lose this benefit if they leave their job. Funds from an HRA cannot be used to pay health insurance premiums for employees.
Unused balances in an HRA can be carried forward to the next year, although the employer may set a limit on the amount that can be rolled over.
Health Reimbursement Arrangements vs. FSAs and HSAs
Employees who have both an HRA and an FSA cannot choose which plan to use to pay for expenses. Instead, the employer determines which plan will be used first. After funds in the first plan have been depleted, the second plan can be used to cover any additional eligible medical expenses.
Employees determine how much of their paycheck to contribute to an FSA. Unused balances in an FSA generally cannot be carried over to the next year. However, the employer can allow a short grace period to use the funds or allow up to $500 to roll over.
Funds that an employee has in an HSA are fully vested. Any money remaining in the account at the end of the year is rolled over and not forfeited. Employees can keep their HSA if they move to another employer.
- Internal Revenue Service: Publication 502 - Medical and Dental Expenses
- Intuit TurboTax: What Is IRS Publication 502?
- AARP: How You Can Deduct Your Medical Expenses
- HealthCare.gov: Using a Flexible Spending Account (FSA)
- Nerdwallet: Can You Claim Medical Expenses on Your Taxes This Year?
- TaxSlayer: What Kinds of Medical and Dental Expenses Can or Cannot be Deducted?
- Investopedia: Health Reimbursement Arrangement (HRA)
- Internal Revenue Service: Health Savings Accounts and Other Tax-Favored Health Plans
- Internal Revenue Service: Health Reimbursement Arrangements (HRAs)
- Internal Revenue Service: Schedule A
- Congress.gov. "H.R.3301 – Taxpayer Certainty and Disaster Tax Relief Act of 2019." Accessed Jan. 4, 2020.
- Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2020." Accessed Jan. 4, 2020.
- Internal Revenue Service. "Itemize or Choose the Standard Deduction." Accessed Jan. 4, 2020.
- Internal Revenue Service. "Schedule A Itemized Deductions." Accessed Jan. 6, 2020.
- Internal Revenue Service. "2019 Instructions for Schedule A (2019)." Accessed Jan. 4, 2019.
- Internal Revenue Service. "Publication 502 (2018) Medical and Dental Expenses." Accessed Jan. 6, 2020.
- Internal Revenue Service. "IRS Issues Standard Mileage Rates for 2020." Accessed Jan. 4, 2020.
James Woodruff has been a management consultant to more than 1,000 small businesses. As a senior management consultant and owner, he used his technical expertise to conduct an analysis of a company's operational, financial and business management issues. James has been writing business and finance related topics for work.chron, bizfluent.com, smallbusiness.chron.com and e-commerce websites since 2007. He graduated from Georgia Tech with a Bachelor of Mechanical Engineering and received an MBA from Columbia University.