Medical and Dental Expense Deductions
Unreimbursed medical and dental expenses can be deducted if they are for specific conditions and not just a means of improving general health. Expenses for a spouse and dependents are also deductible. However, the deductibility of medical expenses is limited by the fact that they are itemized deductions subject to a percentage of the taxpayer's adjusted gross income (AGI), which almost completely eliminates the benefits of the deduction for low-income people, since most of them claim the standard deduction. Starting in 2013, the AGI floor will increase to 10%, unless you or your spouse is 65 or over by the end of the tax year, in which case the 7.5% floor will apply until 2016; thereafter, it will be 10% for everyone. So if both spouses work and one of them has substantial medical expenses, then filing separately may lower tax liability. If the alternative minimum tax applies, then the AGI floor is 10%, regardless of age.
Generally, only unreimbursed medical expenses that were paid for a condition that occurred during the tax year are deductible — insurance payments lower the deductible amount. Moreover, the taxpayer must reduce medical expenses by any expected reimbursement, even if the reimbursement will only occur in a later tax year.
Under the new tax package passed by the Republicans at the end of 2017, known as the Tax Cuts and Jobs Act, the medical expense deduction threshold has been reduced to 7.5% of AGI, but only for 2017 and 2018. After 2018, the deduction returns to the 10% of AGI threshold.
The AGI floor also applies to health insurance premiums except for the self-employed, in which case, premiums can be deducted as an above-the-line deduction without itemizing.
|Adjusted gross income (AGI)||$100,000|
|Premiums paid by employee||$5,000||Fully deductible on Form 1040 if self-employed|
|AGI floor = AGI × .1 =||$10,000||10% of AGI if younger than 65; 7.5% otherwise|
|Medical expense deduction||$7,800||= Total Expenses – AGI Floor|
However, if premiums were deducted, then any amount of the premium that is rebated by the insurance company because of the medical loss ratio (MLR) mandate will be taxable. The purpose of the medical loss ratio mandate, as enacted by the Patient Protection and Affordable Care Act of 2010 and modified by the Health Care and Education Affordability Reconciliation Act of 2010, was to force insurance companies to pay at least a minimum amount of their collected premiums for medical expenses for their customers. The MLR is 85% for large group carriers and 80% for small group and individual carriers. If the MLR is less than the minimum amount — in which case, more of the premium was used to pay administrative expenses, key employee costs, and profits — then the difference must be rebated to the plan members.
Tax Tip: Have Your Employer Deduct Health Insurance Premiums Pre-Tax Under a §125 Plan
If you are an employee, a much better way to save on health insurance premiums is to have your employer deduct the premiums pre-tax, which it can do if it has a §125 plan. Most employers do have this plan, but if they do not, it is very easy to establish. Most employees pay a significant percentage of the health insurance premium out of their own pockets. These premiums can only be deducted as a medical expense deduction that is subject to the 10% AGI floor, and even then, only as an itemized deduction. So if the employee does not itemize deductions, which most do not, then the health insurance premiums cannot be deducted at all. However, if the employer deducted the employee's share of the premium pre-tax under the §125 plan, then both the employer and the employee will save significantly on taxes, since the premiums will not be subject either to the payroll tax or to the marginal tax rate of the employee.
Example: you pay $250 per month, for a total of $3000 per year. Your marginal tax rate is 15%. Therefore:
- Your employer saves the employer portion of the payroll tax: 7.65% × $3000 = $229.50
- Your savings of payroll taxes is the same = $229.50
- Your savings of marginal taxes: 15% × $3000 = $450.00
- Your total tax savings: $229.50 + $450 = $679.50
Naturally, if you are in a higher marginal tax bracket, then the savings will be even greater.
What is Deductible?
Generally, deductible costs include diagnosis, mitigation, treatment, cure, or prevention of disease or any treatment for a part or function of the body. Unreimbursed diagnostic procedures are deductible even if the taxpayer had no symptoms of illness or obtained the test without a physician's recommendation. However, expenses for benefiting general health or that are solely for cosmetic purposes are not deductible. Only medicines and drugs that require a prescription are deductible; over-the-counter medicines and drugs except for insulin are not deductible even if prescribed by a doctor. Marijuana is not deductible nor are prescribed drugs that are bought or shipped from another country unless the Food and Drug Administration (FDA) allows the legal importation of the drug. Vitamins, nutritional or herbal supplements are not deductible unless they are recommended by medical practitioner for a specific diagnosed medical condition.
Medical expenses for pregnancy and lactation are generally deductible, including:
- home pregnancy tests,
- breast pumps,
- lactation supplies,
- childbirth classes, such as for Lamaze breathing and relaxation techniques, but does not include the husband or other childbirth coaches that may also attend the class.
The cost of exercise and weight reduction programs is deductible for specific conditions, especially if prescribed by a physician, but not as a general means of improving health. Special foods are also generally not deductible. However, the Tax Court has allowed certain deductions for special foods if they are required to ameliorate a specific medical condition, but only the extra cost of the food over ordinary food is deductible, since the taxpayer has to eat regardless of health.
If payments to a retirement community include a portion of the monthly fee for medical care, then that portion is deductible, as is advance payments for lifetime care. Advance payments for the lifetime care of a disabled dependent are also deductible.
Cosmetic procedures are generally not deductible unless they are to improve the disfigurement related to a congenital abnormality, or the result of a disease or an accidental injury.
Insurance or other reimbursements reduce the amount of the deduction of medical costs, first for the medical expense for which insurance was paid, then the excess is applied to any other deductible medical costs.
For spouses, where one is incapacitated either physically or mentally, the working spouse may have to provide personal care and housekeeping services for the incapacitated spouse. Personal care services are generally deductible, but housekeeping services are not deductible as medical expenses. However, if the nonworking spouse is either physically or mentally incapable of self-care and if the housekeeping services are necessary so that the working spouse can continue to work, then the housekeeping expenses may qualify for the dependent care tax credit.
Personal injury settlements or awards are generally not treated as reimbursements of medical bills, and thus do not reduce the medical expense deduction. However, if the court specifically allocates that a portion of the proceeds be allocated to pay for medical expenses, then the deductibility of those medical expenses is reduced by the amount of the reimbursement. If the court allocates some of the payments to future medical costs, then those medical expenses can only be deducted in the year in which they are incurred, and must be reduced by the amount of the payments from the lawsuit. Insurance proceeds that are illegally received because of fake claims are treated as taxable income, and are not reduced by any medical expenses.
Healthcare Insurance Premiums
Premiums of health insurance and Medicare policies are generally deductible. However, the deduction for taxpayers other than the self-employed is subject to the medical-expense AGI floor on Schedule A, Itemized Deductions, which is an itemized deduction that will not be useful unless the total of itemized deductions is greater than the standard deduction, but the self-employed can claim the entire premium as an above-the-line deduction. The deduction is also allowed for shareholders of an S corporation, for general partners, and for limited partners who are guaranteed a specific amount. Premiums for Medicare Part A, Medicare Part B Supplemental Insurance and Medicare Part D Prescription Drug Insurance, long-term care, vision and dental care are also deductible.
However, the premiums for insurance that pays a specific amount regardless of the actual medical expenses are not deductible. Likewise, premiums for insurance that pays a specific amount for the loss of earnings or indemnifies the taxpayer for the loss of life, limb, or sight are not generally deductible. If a policy covers both medical care and loss of income or specific payments, then only that part of the premium for which there is a specific statement from the insurance company that part of the premium is allocated to medical care is deductible and only if the allocated premium is reasonable.
Reimbursements in Excess of Medical Expenses
If you paid all the premiums for an insurance policy, then any excess payments from the insurance policy over and above your actual medical expenses are not includable in your income. However, if the employer paid part or all of the premiums, then the excess is taxable unless the payments were for permanent disfigurement or the loss of bodily functions. If you receive insurance payments from several insurance policies, where you paid the premiums on 1 or more policies and your employer paid premiums on the others, then any excess payments are taxable according to the following equation:
Taxable Income = Reimbursement Allocated to the Employer's Policy/Total Insurance Proceeds
|Employer Contribution to your Medical Insurance||$800|
|Annual Cost of Policy||$4,000|
|Employer's Contribution Percentage = Employer Contribution/Annual Cost of Policy||20%|
|Taxable Excess Reimbursement = Excess Reimbursement × Employer's Contribution Percentage||$240|
If you claimed a medical deduction in one year, but then received compensation for the medical expense in a later year, then the amount that was deducted must be included in your gross income in the year it was received.
Summary: Is Your Excess Medical Reimbursement Taxable?
- The excess reimbursement is not taxable if:
- your employer did not pay any part of the premium; or
- the portion that the employer paid was included in your income
- All of the excess reimbursement is taxable if your employer paid all of the premium, but did not include it in your income
- Part of the excess reimbursement that was paid by your employer but was not included in your income is taxable
Medical Expenses of Spouses and Dependents
Expenses are generally deductible for the payments of medical care for your spouse if you were married either when the medical services were received or when you paid the expenses. Thus, payments for medical expenses for your spouse can be deducted even if you were divorced or you or your spouse is deceased. Also, if you pay the expenses of a new spouse, whose medical expenses were incurred previous to the marriage, then those payments are deductible. If you live in a community property state, then medical expenses paid out of the community fund is apportioned equally to you and your spouse, if you file separately.
If medical expenses are paid for an individual who was your dependent when the medical services were provided or when the medical expenses were paid, then you can deduct the payments. Medical costs for qualifying children or relatives can be claimed even if you cannot claim the exemption because:
- they are claimed by the other parent as a dependent;
- gross income exceeds the limit for qualifying relatives, which is $4,050 for 2017;
- the dependent files a joint return with her spouse; or
- the taxpayer is a dependent of another, which ordinarily would prevent the taxpayer from claiming anyone else as a dependent.
However, a qualifying child or relative must be a United States citizen or national, or a resident of the United States, Canada, or Mexico unless the child is adopted and lives with you. If you can claim the person as a dependent under a multiple support agreement, then the payment of those medical expenses is deductible.
Payments for a deceased spouse or dependent are also deductible whether they are paid before or after the person died. If the personal representative of the estate pays the decedent's medical expenses within 1 year after death, then the personal representative can elect, by filing an amended return, to treat the expenses as if the deceased had paid them in the year that the medical services were provided.
Travel for Medical Treatment
Travel costs for medical care are deductible, but are subject to the AGI floor. You can use either the standard mileage rate or actual out-of-pocket costs for gas, oil, repairs, tools, and parking fees, but not depreciation, general maintenance, or insurance for the motor vehicle.
|Year||Cents per Mile|
Travel costs to a medical conference, but not meals or lodging, are generally deductible if the conference is about an illness that is suffered by you, your spouse, or your dependents. Travel, lodging, and meals are deductible if the travel is for treatment that is being received at a licensed hospital or similar facility. The deduction for lodging is limited to $50 per night per person, but only for people who are actually needed on the trip, such as a parent taking a child.
Transportation costs to a school for the mentally or physically disabled dependent, where the school's objective is to specifically alleviate or ameliorate the disability are generally deductible if it is on the recommendation of a doctor. However, the school must have programs specifically for the disability to qualify for the deduction. Payments for medical services, meals, lodging to a nursing home, convalescent home, or sanitarium for you, your spouse or your dependents are also deductible. However, if medical care was not the main reason for the admission, then meals and lodging are not deductible, but the expenses for medical care are.
Other Medical Expenses
The wages of nurses or other caretakers are generally deductible, including any taxes paid on their behalf. The caretaker does not have to be a registered nurse as long as the aid is providing nursing services. However, household services provided by the aid are generally not deductible unless the defendant is chronically ill and needs assistance in living. A dependent care credit can also be claimed for nursing help, but any amount claimed as a credit cannot be deducted as a medical expense. However, any costs over and above the amount of the credit are deductible.
Home Improvements as Medical Expenses
Home improvements that have been undertaken for medical reasons are generally deductible. However, if they increase the value of the home, then the added value is not deductible as an expense, but it does increase the tax basis of the property, which lessens the taxable gain when the property is sold. The IRS assumes that certain improvements do not add value to the home, which are generally improvements to help the disabled, such as installing a ramp or railing and widening doorways or hallways. A home-improvement can still be deductible as a medical expense even if it adds value to the home, but the deduction is reduced by the amount of added value:
Deductible Home Improvement Expense = Cost Of Home Improvement – Added Value to Home
|Home Improvement Cost||$30,000|
|FMV of Home after Home Improvement||$240,000|
|FMV of Home before Home Improvement||$220,000|
|Increase in FMV = FMV after – FMV before =||$20,000|
|Deductible Medical Expense = Home Improvement Cost – Increase in FMV =||$10,000|
The expenses for adding ramps, railings, support bars, modifying doorways and stairways, or altering cabinets, outlets, fixtures, and warning systems are generally not considered increasing the value of the home, so the cost for these improvements are deductible, but still subject to the AGI floor.
The cost of installing a swimming pool may be deductible if the pool is designed specifically to treat a certain medical condition, and only that value that exceeds the added value to the home can be deducted. However, if the pool seems mostly for recreation, then the IRS may disallow the deduction.
Whether a home improvement is fully deductible, the cost of operating and maintaining the equipment is generally deductible as a medical expense. So if an elevator is installed in the home, then the elevator is generally considered to add value to the home, but the cost of maintaining and operating the elevator are fully deductible as medical expenses if it was installed for that purpose.
The purpose of any home improvements, including a swimming pool, must be because of medical necessity rather than convenience in order to be deductible as a medical expense.
When Medical Expenses Can Be Deducted as Business Expenses
Some medical expenses can be deducted as business expenses if they are required for a job. While business expenses are not subject to AGI floor, expenses for employees are subject to the 2% AGI floor that applies to miscellaneous expenses. However, if the expenses are required to allow the taxpayer to work, then they are generally fully deductible. Employees can deduct the expenses as a miscellaneous itemized deduction not subject to the 2% AGI floor. Self-employed taxpayers can deduct the full cost, not only against income taxes but also against employment taxes. However, the cost of a physical examination required by an employer can only be deducted as a miscellaneous job expense subject to the 2% AGI floor.
Impairment-related work expenses can only be deducted if they specifically allow the taxpayer to work; otherwise, they can only be deducted as a medical expense rather than as a business expense. So for instance, if you require assistance to do your job, then the payment for the assistance including travel expenses and other costs are fully deductible.
Long-Term Care Premiums and Unreimbursed Costs for Long-Term Services are usually Deductible
Premiums for qualified long-term care policies are deductible, but the amount depends on your age:
|Age < 40||$420||$410||$390||$380||$370||$360||$350|
|40 < Age ≤ 50||$780||$770||$730||$710||$700||$680||$660|
|50 < Age ≤ 60||$1,560||$1,530||$1,460||$1,430||$1,400||$1,360||$1,310|
|60 < Age ≤ 70||$4,160||$4,090||$3,900||$3,800||$3,720||$3,640||$3,500|
|70 < Age||$5,200||$5,110||$4,870||$4,750||$4,660||$4,550||$4,240|
The premiums paid for a long-term care policy are deductible only if they satisfy these tax requirements:
- the contract must be guaranteed renewable;
- the policy must have no cash surrender value or money that can be assigned, pledged, or borrowed;
- the policy does not reimburse expenses paid by Medicare, unless Medicare is a secondary payer or the contract is for per diem payments that are paid without regard to actual expenses.
Unreimbursed expenses for qualifying long-term care services can be deducted as medical expenses if you, your spouse or dependents are chronically ill.
A chronically ill person must be either certified by a licensed healthcare practitioner that, within the preceding 12 months, the person was unable to perform at least 2 of the daily activities required for living without assistance for at least 90 days: eating, dressing, toileting, bathing, maintaining continence, or someone who suffers from severe cognitive impairment, such as from Alzheimer's disease.
Services must be provided for care that was prescribed by a licensed healthcare practitioner who is approved by the IRS, such as a physician or registered nurse. Services provided by a spouse or relative are not deductible unless the person is a licensed professional to provide such services. Likewise, services provided by a related corporation or partnership are also not deductible.
Benefits from a qualified long-term care insurance policy are generally excludable from gross income. However, if the payments are paid periodically without regard to actual expenses, then the maximum amount that can be excluded as tax-free is $300 per day. Any payments exceeding that amount are tax-free only to the extent that they are used to pay unreimbursed expenses.
The taxpayer receiving long-term care insurance payments should receive a Form 1099-LTC that shows whether the payments were made on a per diem basis or were reimbursements of actual expenses. These payments must be reported on Form 8853, Archer MSAs and Long-Term Care Insurance Contracts to determine whether any of the payments are taxable.
In some cases, a person with a terminal illness may use accelerated death benefits that come with some life insurance policies to pay for the medical care of the terminally ill. If the insurance policy does not have an accelerated payment clause, then your can sell your life insurance policy to a viatical settlement company that buys policies from terminally ill patients for a fraction of their worth so that the patients can pay for medical expenses. These proceeds, whether from insurance companies or viatical settlement companies, are tax-free. However, if the payments are for long-term care costs, then whether the payments are tax-free are determined under the tax status rules for long-term care costs.