When evaluating the tax benefit of medical expense payments, it is important to know that you must incur significant medical expenses before the first dollar becomes deductible. On Federal, taxpayers must meet a 7.5% of adjusted gross income (AGI) threshold before they receive any benefit. So, for a taxpayer with $200,000 of income, uncovered medical expenses must exceed $15,000 before any deduction is allowed.
Generally, unless your income is low or you have major uncovered health issues, the deduction will be limited. It’s one deduction you probably don’t want.
What’s deductible as a Medical Expense?
- Insurance premiums. This would include insurance covering medical, dental, vision, drugs, and other medical costs for you, your spouse, and your dependents. Premiums for Medicare are also deductible, but payroll withholdings for Medicare Part A are not deductible. Note: Self-employed individuals may qualify for a 100% above-the-line deduction.
- Qualified long-term care premiums are deductible but subject to limitations depending on age and policy cost. Before purchasing a policy, make sure it is a qualified contract.
- Weight-loss and exercise programs are deductible if a physician recommends them for treating a specific illness.
- Annual physicals and related diagnostic tests are deductible medical expenses—you do not have to be ill to deduct diagnostic tests.
- Doctor, dentist, chiropractor, and other professional services.
- Medical expenses for your dependents. In determining if someone qualifies, some of the dependency tests can be disregarded. For example, if you pay medical expenses for a parent, you might be able to deduct even if that parent’s income exceeds the limit for qualifying relatives.
- Travel expenses to obtain medical care. Mileage to obtain medical care is deductible at 21 cents per mile. Any associated parking fees or tolls also are deductible. Transportation and lodging could qualify, too.
- Nursing or assisted living facilities. If confined for medical purposes, the payments are deductible. However, if medical care is not the main reason for being in a nursing home, part of the cost for treatment might be deductible but not the costs of meals and lodging.
- If you hire someone to provide nursing services—feeding, bathing, giving medications, etc.
- Drug and alcohol rehabilitation treatments are defined as a medical expense.
What’s not deductible?
- The cost of over-the-counter drugs and medicines is not deductible even if prescribed by a doctor. Vitamins and nutritional supplements are not deductible.
- Cosmetic surgery procedures are not deductible unless related to an accidental injury or disease. Liposuction, teeth whitening, hair transplants as well as other procedures to improve appearance are not deductible. That said, the Tax Court did allow an exotic dancer to deduct the cost of breast implants since she had a business reason for the procedure.
- Payments for future medical care.
- Anything done just to improve your general health (not physician-prescribed) is not deductible—examples include joining a gym or a weight-loss program.
The lists above are not all-inclusive but provide a general idea of deductible and nondeductible medical expenses. When calculating expenses, keep in mind that any insurance reimbursement you receive reduces the deduction. So, if a medical procedure is billed at $1,000 and insurance covers $900, your deduction is limited to an uncovered expense of $100.
Now, let’s look at home improvements as a medical expense.
A physician might recommend special equipment or home improvements to address an illness, which might qualify as a deductible medical expense. However, if the improvement increases the value of your home, the deduction is reduced by the property value increase.
Planning Tip:
For Alabama, the floor is 4% of AGI. Alabama income for a retired taxpayer is generally lower as social security and payments from defined benefit pension plans are not taxed. Also, qualified long-term care insurance premiums are not limited and are deducted separately (not included in the 4% floor). So, if you are an Alabama taxpayer, you need to separately evaluate medical expenses for state taxes.
Complete Itemized Dedication Series
This series is intended to cover the most common deductions. Please keep in mind that there are always exceptions; what’s more, your situation or facts may be different from someone else. We recommend that you consult with your tax advisor before taking any action.
Part 1: The Basics
Part 2: Deductions and Medical Expenses
Part 3: Deduction for Taxes
Part 4: Deducting Mortgage Interest & Investment Interest
Part 5: Contributions & Charitable Giving
Part 6: Casualty & Theft Losses
