Maximizing Medical Expense Deductions

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Here’s what you need to know claim medical expense deductions on your taxes and how to increase you deductions.

What Medical Expenses You Can Deduct

First, you can only deduct medical expenses that exceed 7.5% of your Adjusted Gross Income.

If your AGI is $100,000, that’s $7,500. If you had $10,000 in qualifying expenses, you have to subtract the 7.5% ($7,500). You can then deduct $2,500.

Second, you can’t include any amount that was paid by insurance. You also can’t include amounts paid with HSA money, FSA money, or other tax-advantaged money. Only expenses you paid with your after-tax cash count.

The IRS definition of medical expenses is

Medical care expenses include payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or payments for treatments affecting any structure or function of the body.

Tax Topic 502

That includes:

  • Payments to doctors and dentists
  • Inpatient hospital or nursing home care
  • Certain alcohol, drug, or nicotine addiction treatments
  • Weight loss programs for specific diseases or conditions (but not general dieting)
  • Most prescription drugs
  • Items that assist with disabilities such as glasses, hearing aids, wheelchairs, and service dogs
  • Transportation to medical treatment
  • Medical insurance premiums not paid for by an employer or government subsidies

Itemized Deductions vs. Standard Deductions

Medical expenses are an itemized deduction. So you can only claim your medical expenses if you have itemized deductions bigger than the standard deduction.

If you have $1,000 in qualifying medical expenses but no other itemized deductions, you’ll take the standard deduction because it’s bigger.

How to Make the Most of Your Medical Expense Deduction

To make the most of your medical expense deduction, you need to look at the three main ways you can not get it:

  • Having expenses less than 7.5% of your AGI
  • Not having enough deductions to itemize
  • Using HSA money

I’m not including health insurance. I can’t think of any reason you wouldn’t submit a health insurance claim.

Either health insurance pays 100% or you can deduct what’s not paid by health insurance. A deduction is only worth your tax rate.

Examples assuming 20% tax rate:

  • $1,000 covered by insurance — you get back $1,000 from insurance
  • $1,000 with $500 covered by insurance — you get back $500 from insurance plus $500 x 20% = $100 from the IRS = $600 you get back and $400 you spent.
  • $1,000 not covered by insurance — you get back $1,000 x 20% = $200 from the IRS.

Strategy 1: Time Your Procedures

Let’s say you’re going in for a series of elective procedures. You’ll have $10,000 in total expenses that qualify for the medical expense deduction.

If you have $5,000 worth of treatment done in December and $5,000 worth of treatment done in January, you might not get any deduction for two reasons:

  • You might be under the standard deduction
  • Your expenses might be under 7.5% of your AGI

If you push everything to January, you’ll have a $10,000 potential deduction instead of a $5,000 potential deduction. That’s more likely to be both:

  • More than the standard deduction
  • More than 7.5% of your AGI

Another thing to think about is your health insurance. If you haven’t used up your deductible for the year, waiting until next year can save you from having to pay your deductible in both years.

Strategy 2: Using HSA Money (Or Not)

You can generally save your HSA money for an unlimited amount of time. You can either use it for future medical expenses or withdraw the money for other reasons once you hit retirement age.

Many people use an HSA as a second IRA and continue to pay cash for medical expenses.

When deciding whether to use HSA money, figure out whether you’ll benefit from taking the itemized medical expense deduction.

  • If you’ll be able to itemize your medical expenses, consider saving your HSA money for later to maximize your medical expenses deduction.
  • If your medical expenses will be under the AGI limit or your total itemized deductions will be under the standard deduction, it can make sense to use your HSA money if you’re not saving it for retirement.

Making This Easy

The above may or may not sound complicated depending on how familiar you are with these tax concepts.

If you mostly get it, open up your tax filing software. Try it different ways — spreading the expenses over two years, doing it in one year, and using your HSA or not to see what saves you more.

If you’re not sure, ask a tax accountant to walk you through everything.

And of course, talk to your doctor about timing things. Your health is more important than waiting to try to save on your taxes.

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