Will You Be Able to Deduct Your Medical Expenses in Retirement?

Paying for the cost of health care. Peter Dazeley/Getty Images

You've certainly been told some expenses, like commuting and work clothes, will decrease in retirement. Other expenses, as the standard advice goes, will increase. The most likely culprit? Medical expenses.

According to recent estimates from Fidelity, the average couple can expect to spend just under $250,000 in health care expenses throughout their retirement. Health care expenses are usually top concern for current retirees and pre-retirees preparing to make the transition to retirement.

Despite the expected additional time to be spent in doctor's offices, hospitals, and the occasional walk-in clinic, a silver lining just might be found on your tax return in the form of potential income tax deductions.

Are Medical Expenses Deductible?

Since medical and dental expenses are often one of the largest expenses for retirees it is helpful to know that most medical and dental expenses are deductible. Tax deductions are generally available for insurance premiums (including Medicare premiums) and long-term care insurance premiums. The typical hip replacement surgery, prescription drug, or even nursing home care is tax deductible.The primary exclusions are non-prescription drugs and those expenses which are more cosmetic in nature, like teeth whitening. 

Here are examples a few other medical deductions that are often overlooked by taxpayers:

  • Medically necessary costs prescribed by a physician. That means if your doctor told you to add a humidifier to your home's heating and air-conditioning system to relieve your chronic breathing problems, the device -- and additional electricity costs to operate it -- could be at least partially deductible.
  • Travel expenses to and from medical treatments. During 2017, the mileage deduction is decreased to 17 cents per mile.
  • Uninsured medical treatments.  This could include everything from an extra pair of eyeglasses  to an order of contact lenses, dentures, hearing aids and prosthetic limbs.
  • Substance abuse treatment costs. Alcohol and drug rehabilitation programs are potential itemized deductions.
  • Laser vision corrective surgery.  This can also be used as an itemized deduction on Schedule A. 

To learn more about the actual medical expenses that qualify for a tax deduction see the Tax Guide for Seniors (IRS publication 544) provided by the IRS.

Subtract the Reimbursements in Calculating Your Medical Expense Deduction

To be fair, you can never deduct any payment you make which is reimbursed. This makes sense, since you didn't really pay the bill in such a situation after all. 

Health Insurance Premiums are Deductible!

One deductible medical expense might surprise you: the health insurance premiums you pay can also be added to your total of deductible medical expenses. This includes, of course, any Medicare premiums.This includes the cost of long-term care insurance, up to certain limits based on your age. Insurance payments must be made from after-tax income.

Limits on the Helpfulness of the Medical Expense Deduction

While numerous types of medical expenses are deductible, you must itemize in order to take the medical expense deduction. This means the total of your itemized deductions must exceed your standard deduction.This can often be a challenge for older Americans, since the standard deduction increases once you hit age 65 and/or are blind.

Even if you itemize, furthermore, medical expenses are only deductible to the extent they exceed 10% of your adjusted gross income (AGI).

Prior to 2017 the medical expense deduction had to exceed 7.5% of AGI for those age 65 or older. The threshold was previously set at 10% of AGI for individuals under 65. But that recently changed for all taxpayers regardless of age. Starting on January 1, 2017, everyone may deduct only the amount of the total unreimbursed allowable medical care expenses for the year that exceeds 10% of AGI. Here's where your presumably lower income during retirement is a potential asset; because your AGI is lower, so is the threshold by which your medical expenses must exceed in order to provide you with a tax benefit.

Only around one-third of all taxpayers itemize deductions in the first place.

But there are situations where the medical expense deduction can be a helpful way to reduce taxes. If you are in retirement and your taxable income has lowered your AGI to an amount that allows you to take this itemized deduction you should start pulling together those medical bills and receipts. Also, if your expenses are high due to a one time medical event or surgery you may be able to use the medical expense deduction.

Schedule A (Form 1040) is used to calculate your itemized deductions. You can view a copy of Schedule A here. Publication 502 explains the medical and dental expenses that may be claimed on Schedule A.

If you anticipate the need to pay a high amount of medical expenses for yourself or others during retirement, it is often wise to keep track of your medical expenses in the event that you need to add this itemized deduction. So save those receipts - Uncle Sam just might help you out with a medical expense deduction!

Updated by Scott Spann