Getting sick can be a real pain in the neck, but at least Uncle Sam gives Americans a little bit of relief in the form of federal income-tax deductions for medical expenses.
“Medical bills can be a huge expense, so the Internal Revenue Service gives people a break so they can recoup some of that money,” says Lisa Greene-Lewis, a certified public accountant with TurboTax.
Some 10.2 million U.S. households collectively deducted $85.3 billion of medical expenses on their 2012 federal tax returns, according to the latest available Internal Revenue Service statistics. Many Americans can make similar write-offs from their state income taxes as well.
But who can deduct what is pretty complicated, and experts say few taxpayers really understand the rules.
“I think the biggest misconception is that people think that all medical expenses are deductible from dollar one. But for my clients, I’d say that well under 10 percent actually qualify to deduct anything,” says Rob Seltzer, a Los Angeles certified public accountant and chairman of the California Society of CPAs’ Financial Literary Committee.
Here’s a look at the basics of deducting medical expenses from your federal income taxes. Consult your tax adviser for specifics regarding your personal situation.
Who qualifies for medical-expense deductions?
The Internal Revenue Code includes two big rules that can severely limit who truly qualifies for relief from medical expenses:
You must generally itemize deductions on Form 1040 Schedule A rather than take the “standard deduction” if you want a break on medical expenses. If what you plan to deduct for everything (from medical bills to mortgage interest) adds up to less than the standard deduction ($6,400 for singles and $12,600 for married joint filers for tax year 2015), there’s no point in itemizing.
Most taxpayers can only deduct allowable medical expenses that exceed 10 percent of “adjusted gross income” (AGI). That’s the amount you earn in a given year from wages, investments and other sources minus what you paid for alimony, student-loan interest and a few other things. So, if a married couple has $100,000 AGI and $10,500 of qualified medical expenses, they can deduct only $500 — $10,500 minus $10,000 (10 percent of their $100,000 AGI). Seniors age 65 or older can deduct any medical expenses above 7.5 percent of AGI.
Seltzer says the only taxpayers who pass both tests are typically those with unusually high medical expenses relative to income. That’s often just the elderly, the unemployed, low-income people or those with big medical bills due to serious illness, in-vitro fertilization or a child’s birth.
Are health insurance premiums deductible?
Yes, in certain circumstances, you can deduct your health insurance premiums as part of your overall medical expenses.
But you can deduct only premiums that you pay with after-tax money from your own pocket. For example:
If your health insurance premiums are paid entirely by your employer or the government, you cannot deduct the cost.
If you have health insurance through your employer and your share of the premium is deducted from your paycheck pre-tax, you cannot deduct the cost because the premiums were tax-free already. If you don