Kyle Merry, Tax Associate, and Joshua Buckingham, CPA and Principal at TD&T focus on two commonly used tax deductions in this article.
The medical expense deduction is one of the more detailed tax subjects for clients. In most instances this deduction will not qualify due to not meeting the minimum threshold. However, there are some expenses and improvements that will qualify that most individuals would not consider medical expenses. The following article will discuss the minimum threshold for medical expenses and what expenses are eligible for this deduction.
What Medical and Dental Expenses Can You Deduct?
If you itemize deductions, you may be able to deduct expenses on Form 1040, Schedule A for medical and dental care for yourself, your spouse, and your dependents spent during the taxable year. The eligible amount you can deduct depends on your income:
- You can deduct the amount of medical expenses that exceed 10% of your adjusted gross income for the tax year. Most individuals are unable to meet this threshold with common medical expenses.
- If individuals were to go over 10% of their gross income for medical expenses, they would then itemize on their Schedule A.
Examples of Deductible Expenses
Here are some of the expenses you can deduct to get to the 10% threshold:
- Health Care Insurance Premiums – If you are healthy, this could well be your largest medical and dental expense. The IRS allows you to deduct the portions of this expense that your employer does not pay for if you are in a company sponsored plan. Anything you paid pre-tax is not deductible. If the amount paid shows up in box 1 on your W-2 Form, it’s not deductible. The Schedule A instructions provide more information on the deductibility of health insurance premiums. Some states, however, allow more of your premium to be deductible on state tax returns, so make sure to check state regulations, too.
- Payment of fees to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, and nontraditional medical practitioners.
- Inpatient hospital care or residential nursing home care – Nursing home and Assisted Living Care deductibility requires that availability of medical care is the primary reason for being in the nursing home. If the individual needs assistance with two activities of daily living, such as walking, eating, standing etc., the entire bill can be deducted. Some individuals go to assisted livings or nursing homes for some assistance, but primarily for socialization or to make sure their meds are taken properly. In this case the facility can break down the costs, but only the cost for medical care can be deducted. Talk with the provider to see how many activities of daily living they are assisting with to determine the amount of expense that can be deducted.
- Expenses related to treatment for alcohol or drug addiction or smoking-cessation – This can include acupuncture treatments, inpatient treatment at a center, and drugs to alleviate nicotine withdrawal that require a prescription.
- Weight Loss Programs – This can include programs for a specific disease or diseases diagnosed by a physician, including obesity. It does not ordinarily include payments for diet food items or the payment of health club dues.
- Various Medically-Related Devices – including false teeth, reading or prescription eyeglasses, contact lenses, hearing aids, crutches, and wheelchairs.
- Guide Dog or Service Animal – to assist a visually impaired or hearing disabled person, or a person with other physical disabilities.
- Transportation Primarily For And Essential To Medical Care – Expenses in this category must qualify as a medical expense. Costs could include the actual fare for a taxi, bus, train, or ambulance. It can also include costs for transportation by personal car, including the amount of your actual out-of-pocket expenses such as for gas and oil, or the amount of the standard mileage rate for medical expenses, plus the cost of tolls and parking .
Self-Employed Adjustment to Income
If you’re self-employed and have a net profit for the tax year, you may qualify for the self-employed health insurance deduction. You receive this as an adjustment to income, rather than an itemized deduction, for premiums you paid on a health insurance policy covering medical care. It can include a qualified long-term care insurance policy covering medical care, for yourself, your spouse, and dependents.
In addition, if you have a child who is under the age of 27, you may be able to take this deduction even if the child wasn’t your dependent. IRS Publication 535 provides more information on this topic. See chapter 6 for eligibility information. Also, if you don’t claim 100% of your paid premiums, you can still include the remaining premium with your other medical expenses as an itemized deduction on Form 1040, Schedule A.
What’s Not Deductible?
The instructions for Schedule A go into greater detail on non-deductible items. The IRS also provides a template to help you estimate your deductible medical expenses. Look for “Can I Deduct My Medical and Dental Expenses?” on the IRS website. Here are some examples of non-deductible items:
- Funeral or burial expenses
- Over-the-counter medicines (i.e., medicines or drugs that aren’t required to be prescribed)
- A trip or program for the general improvement of your health
- Most cosmetic surgery
- Nicotine gum and nicotine patches that don’t require a prescription.
Some Additional Pointers:
- You can only deduct the medical expenses you paid during the year.
- You can only use the expenses once on the return.
- If you received reimbursement for medical expenses, you must reduce your total deductible medical expenses for the year by that reimbursement. This includes expenses used when figuring other credits or deductions. This applies whether you receive the reimbursement directly or it’s paid on your behalf to the doctor, hospital, or other medical provider.
Home Improvements for Medical Reasons Can Also Qualify
If you need to make changes of improvements to your home for medical reasons, those costs can qualify for a tax deduction. The IRS scrutinizes these kinds of claims, so it pays to know the rules and to follow them closely. In some cases, it may require you to get a written direction from your doctor saying that you need to make these changes for health reasons.
You may not deduct all of the costs associated with major expenses that improve the resale value of your home. For example if your doctor recommends that you install an air cleaning system for allergy or asthma reasons and it costs $12,000, it may also add $8,000 to the home’s resale value. Your deduction would be limited to the difference, $4,000. Adding a bathroom on a lower floor for a person who can’t do steps anymore would qualify for the deduction, but it would also add to the home’s value.
Some Improvements Don’t Necessarily Add to the Home’s Value
Other expenses, while satisfying medical needs, might not add to the home’s value due to the nature of the improvement. They would likely qualify for the full deduction of the cost. Examples include:
- Adding ramps to make your home more accessible for a wheelchair.
- Widening hallways and doors to accommodate wheelchairs.
- Adding railings and support bars to a bathroom or a hallway.
- Moving electrical outlets.
- Lowering kitchen cabinets to make them more accessible.
- Replacing door hardware with handles that are easier to open.
- Modifying entrance and exit doors and sidewalks to make them accessible.
- Updating fire alarms and other warning systems to accommodate the needs of the individuals.
Document All Changes You Want to Deduct
Start with getting your doctor to provide a statement detailing the need for making the improvements. If you have a lot of costs to deduct, you can get a real estate appraiser to provide an estimate of the dollar impact the change will have on your home’s resale value. You could then deduct the difference between the total costs and the increased in value. Having the documentation will help if the IRS questions your deduction and asks for further evidence of the need for the improvements.
Do Some Research
The IRS covers the details on medically related expenses in IRS Publication 502, “Medical and Dental Expenses.” Taking some time to review this document before you making improvements could help you make the best decisions that meet your medical needs while reducing your tax burden as well.
As always, we at TD&T welcome your questions and conversation on this and other tax-related issues.