When evaluating the tax benefit of medical expense payments, it is important to know that you must incur significant nondeductible medical expenses before the first dollar becomes deductible. For taxpayers under age 65, your unreimbursed medical expenses must meet a 10% of adjusted gross income (AGI) threshold before you receive any tax benefit. For those over 65, the threshold is 7.5% of AGI. Generally, unless your income is low or you have major health issues, the deduction will be significantly limited.
- Insurance premiums. This would include insurance covering medical, dental, vision, drugs and other medical costs for you, your spouse and dependents. Premiums for Medicare also are deductible; but payroll withholdings for Medicare Part A are not deductible. Note: Self-employed individuals might qualify for a 100% above-the-line deduction.
- Qualified long-term care premiums are deductible but subject to limitations depending upon 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 24 cents per mile. Any associated parking fees or tolls also are deductible. Transportation and lodging could qualify, too.
- Nursing homes. 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.
- Nursing. If you hire someone to provide nursing services—feeding, bathing, giving medications, etc.
What’s not deductible?
- The cost of over-the-counter drugs and medicines are not deductible even if prescribed by a doctor—this includes medical marijuana. Unless prescribed by a physician to treat a specific illness, vitamins and nutritional supplements are not deductible either.
- 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 $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, and that 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.
Take time to consider some differences between federal and Alabama. 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.
Next time, we’ll address the tax sections on Schedule A.