Medical expenses can take a serious chunk of your household budget and income, especially when they come from unexpected emergencies. Fortunately, the Internal Revenue Service gives you some relief by making some of these medical expenses deductible on your tax return. But you have to understand which medical and dental expenses are deductible and how you can take advantage of this tax break.
You can use IRS Publication 502 to calculate your medical deductions and to 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 them. This means that you can't take the standard deduction. You should only claim a medical expenses deduction if your total itemized deductions are greater than the standard deduction available to you for your filing status.
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. It appears on line 11 of your Form 1040 tax return.
- 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 your adjusted gross income and enter it on line 4.
You should itemize if your medical expenses above the 7.5 percent threshold plus your other itemized expenses is greater than your standard deduction. You'd be better off claiming the standard deduction otherwise because it would subtract more from your taxable income.
Read more: Are Medical Expenses Deductible?
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. 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. 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
You can only deduct $1,250 in medical expenses ($5,000 minus $3,750) because of the 7.5 percent threshold. Your total itemized deductions would therefore 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 want to itemize your deductions in this case because the standard deduction for single taxpayers is $12,550 in tax year 2021, the return you'll file in 2022. This is greater than your total itemized deductions of $8,250. You'd be paying taxes on $4,300 more in income than you have to if you itemized ($12,550 minus $8250). You'd lose the medical deduction because you wouldn't want to itemize.
What Medical Expenses 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: Including in-vitro fertilization and surgery related to increasing fertility
- Alternative treatments: Acupuncturists
Read more: Can You Claim Eyeglasses As a Deduction on Taxes?
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 that might help you avoid future health problems are not deductible. Some of more obvious nondeductible medical expenses include:
- Over-the-counter medicines
- Gym memberships
- Nutritional supplements
- Diet foods
- Nicotine gum or patches
How Do You Handle Reimbursements?
You must reduce your total medical expenses for the year by the amount of reimbursements if you pay some out-of-pocket medical expenses and your insurance company later reimburses you. This would also include any Medicare payments.
You must still deduct these reimbursements from your total medical expenses even if your insurance company only reimburses you for a few specific expenses out of the total bill.
Health Insurance for Self-Employed Persons
Self-employed persons can deduct 100 percent of their medical insurance premiums plus premiums for age-based long-term care coverage as adjustments to income. This is not the same as claiming an itemized deduction. A self-employed person doesn't have to itemize to claim an adjustment to income, which is subtracted from your income before you claim the standard deduction or the total of your itemized deductions.
Medical expenses in addition to insurance premiums must be reported on Schedule A. Medical insurance premiums for self-employed persons are recorded on line 17 of the 2021 Schedule 1, which you'd file with your tax return in 2022. This figure plus any other adjustments to income are recorded on line 10 of the 2021 Form 1040.
Self-employed persons can't 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. The adjustment to income would be limited to $8,000 if the sole proprietorship reported an income of $8,000, but the insurance premiums were $11,000. A deduction could not be claimed if the business reported a loss because the business must have profits to offset the expenses.
What Is a Flexible Spending Account?
You can set up a Flexible Spending Account (FSA) to pay out-of-pocket costs for copayments and deductibles if you have health insurance provided by your employer. FSAs can be used in conjunction with unreimbursed and deductible medical expenses that are allowed by Publication 502.
You can have a certain amount deducted pre-tax from your paycheck to contribute to an FSA. Employers can also make contributions to your FSA, but they are not required to do so by law.
You would withdraw funds from your FSA by submitting a claim to the FSA administrator along with documentation of medical expenses and a statement that the expense was not covered by your regular health insurance plan. The FSA administrator will reimburse you for your cost if your claim is approved.
You can contribute up to $2,750 per year per employer as of tax year 2021, increasing to $2,850 in 2022. 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. But an FSA comes with two options. It allows a grace period of two and a half months to use up the funds in the account, or you can carry $570 over into 2023 if you don't spend the funds by the end of 2022.
What Is a Health Savings Account?
A Health Savings Account is a special personal account that can be used for qualified healthcare expenses, but 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 $1,400 for self-only coverage or $2,800 for family coverage as of the 2021 tax year, and a maximum annual deductible and other out-of-pocket costs of $7,000 or $14,000 respectively.
Contributions are limited to $3,600 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. an HSA is more flexible than an FSA in this respect. You can also 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 as well.
Qualified medical expenses generally follow the rules as outlined by IRS Publication 502, but the employer has the right to exclude certain medical expenses, even if they're accepted by the IRS. The employer's HRA plan documents the list of reimbursable medical expenses.
HRAs are portable. An employee would lose this benefit if they left 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, but 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. The employer determines which plan will be used first. The second plan can be used to cover any additional eligible medical expenses after funds in the first plan have been depleted.
Employees determine how much of their paychecks to contribute to an FSA. Unused balances in an FSA generally cannot be carried over to the next year, but the employer can allow a short grace period to use the funds or allow up to $570 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.
- IRS: 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)
- IRS: Health Savings Accounts and Other Tax-Favored Health Plans
- IRS: Health Reimbursement Arrangements (HRAs)
- IRS: 2021 Schedule A
- IRS: IRS Provides Tax Inflation Adjustments for Tax Year 2021
- Society for Human Resource Management: 2022 Health FSA Contribution Cap Rises to $2,850
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.