Are you missing out on medical expense deductions?
Taxes have become the #1 issue clients want managed. As I mentioned a few weeks ago, the tax prep situation in the US has become grim in part because of growing tax complexity. One big, missed opportunity I see is not deducting medical expenses when they can.
Many miss it because the deduction is income limited and you can’t deduct anything for which you’ve been reimbursed by work or insurance or a flexible spending account. Nonetheless, the IRS definition is substantially broader than many think and if your medical expenses are grouped into one tax year, by choice or misfortune, the tax savings can be large.
The medical deduction has been around since the Revenue Act of 1942, which was part of the building of the modern US financial system between 1932 and 1945. In recent years, fewer Americans have claimed medical deductions compared to mortgage interest and charitable donations. In 2020, only about 4 million out of nearly 150 million filers claimed medical expenses. The average deduction was a whopping $20,000.
The number of filers claiming this deduction is low because of four limits:
1) They must itemize deductions on Schedule A.
2) Medical expenses must exceed 7.5% of the adjusted gross income (AGI) to qualify. For example, if a couple's AGI is $200,000, they could only claim expenses that exceed $15,000.
3) You can only deduct expenses that were not reimbursed.
4) Some of the deductions might require a doctor’s note in case of an audit.
The IRS provides a comprehensive list of eligible medical and dental expenses in Publication 502. According to the IRS, qualified costs include those related to "diagnosis, cure, mitigation, treatment, or prevention of disease" and must be unreimbursed to avoid double-dipping.
Despite these limitations, the spectrum of what qualifies as a medical expense is broader than what insurance typically covers:
Health insurance premiums, co-pays, co-insurance (including fees paid to medical professionals)
Dental, dentures, root canals
Vision and hearing devices
Mental and behavioral Health (drug-addiction treatment, obesity treatment psychotherapy, stop-smoking programs, etc.)
Special education tuition (tuition at specialized schools for students with learning differences like dyslexia can qualify as a medical expense and other lesser-known deductions like fees for professional testing and the cost of transporting a student to and from such specialized schools.)
Long-term care insurance premiums, nursing homes, and assisted living care
Home modifications, ramps, elevators, swimming pools, universal code modifications (may require appraisal)
Travel related to medical appointments
Medical care you pay for someone else even if they are not your dependent
Alternative medicine treatments like acupuncture
Insulin and other prescription medications
Health insurance premiums, including those for Medicare, are generally deductible, except if the taxpayer or their employer received a credit or a deduction for the premiums. Deductions for long-term care insurance are also allowed but limited by age.
Alternative medicine treatments can also qualify. In one case, a taxpayer was able to deduct $30,000 spent on "energy healing" after providing evidence that the treatments were beneficial.
A lesser-known rule allows taxpayers who support and pay medical costs for others, such as elderly relatives, to deduct those expenses on their own returns. This can be applied even if the supported person is not your dependent for tax purposes. This can be helpful for supporting aging parents.
Finally, travel costs to receive medical treatment are deductible. For 2023, the rate is 22 cents per mile for car travel. Lodging costs can also be deductible, with a limit of $50 per night for the patient and one additional person.
When it comes to home modifications like ramps or elevators, the IRS does not require an appraisal for many types of modifications. However, for expenses that permanently increase a home's value, such as installing an elevator or swimming pool, the homeowner must get an appraisal and reduce the deduction by that amount.
However, not all expenses can be deducted. Over the counter medications and cosmetic surgery to improve appearance are not eligible. General health club dues are not reimbursable unless part of an approved obesity program. Funeral expenses were reimbursed up to $9,000 for COVID-19-related deaths, but nothing outside of this special consideration.
For those unable to meet the 7.5% AGI threshold, these same medical expenses can often be reimbursed through a Flexible Spending Account (FSA) or a Health Savings Account (HSA). Ask us or your tax professional if you have questions. Though a rare occurrence, remember that it’s essential to keep good records to validate these claims should you be asked by the IRS.
