Health Insurance and Medical Expenses Are Tax Deductible for Retirees

Don't miss valuable health care deductions in retirement

A retired couple sits in their backyard enjoying a glass of wine together.
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Retirement offers a chance to reap the rewards of a lifetime of hard work. But being able to relax and enjoy your retirement without stressing about money takes some planning ahead. In some cases, you may need to trim your current cost of living budget. One thing you may not be able to make cuts is the cost of health care. As you age, chances are you will have greater health needs, and this part of your spending will increase. Studies show that most people over age 65 will spend $300,000 (per couple) on health care during retirement. This figure is also on the rise, growing higher with each passing year.

One way to offset the high costs of health care when you're retired is through income tax deductions. If you deduct all the medical and dental costs the tax code allows, you may be shocked at how much you can save.

Key Takeaways

  • Medical costs that exceed 7.5% of your adjusted gross income (AGI) can be deducted for tax purposes.
  • You can deduct insurance premiums and most other upfront costs or standard fees that you pay out of pocket.
  • Track your spending on all travel and purchases related to treatment or called for by a health care provider.
  • You must itemize your taxes in order to deduct health care costs.

Which Medical Costs Can I Deduct?

You can deduct the amount of your medical and dental expenses that exceed 7.5% of your adjusted gross income (AGI). If you have very little income during retirement, then the deduction may not help you. Many people who receive only Social Security benefits during retirement do not need to file taxes at all.

But if you are making any money during retirement (such as earnings from a small side business, consultant work, investment dividends, or selling your home), you may be able to reduce your tax liability with medical deductions. Along with direct medical expenses, you can also deduct the cost of insurance premiums, long-term care insurance premiums, and payments to Medicare. Almost all costs for treatments that are deemed medically necessary by a physician are tax-deductible. 

This means that if your doctor told you to add a humidifier to your home heating and vent system to relieve your chronic breathing problems, you could deduct the cost of the device, at least in part. If you have to pay to travel to and from treatments, you can deduct the cost at 16 cents per mile. The cost of in-home care can be deducted if you have a severe or chronic illness—if your doctor prescribes the care.

Costs Not Covered by Your Insurance Plan

There are also a few medical costs that you can deduct that may not be covered by your health insurance plan. These include a wide range of items like an extra pair of glasses, contact lenses, dentures, hearing aids, or prosthetic limbs. Laser vision corrective surgery may fall into this group as well. In some cases, you may be able to deduct the cost of substance abuse treatment programs, such as alcohol and drug rehab. So if you have to pay out of pocket for any of these treatments, you may find some tax relief later on.

Before 2018, older people could deduct medical expenses that exceeded 10% of their AGI, but this was lowered as part of the Tax Cuts and Jobs Act. The current threshold for medical deductions is 7.5%.

Are There Medical Costs I Cannot Deduct?

There are many procedures and services that you cannot deduct from your taxes. The most common exclusions are non-prescription, over-the-counter drugs, and cosmetic treatments like teeth whitening. On a rare occasion, you might be able to deduct the cost of dietary supplements if they're recommended by a doctor for a specific condition.

You can't deduct the costs of toiletries or elective procedures that are not needed to improve your health. Nor can you deduct your monthly gym membership fee, even if your doctor told you to get more exercise.

You're not able to deduct any health-care expenses if you're reimbursed for them or your insurance pays them. Health insurance premium payments made via an employer-sponsored health plan are not deductible either because those payments are made with pre-tax income.

How Should I File Taxes to Claim Deductions?

To claim a medical expense deduction, you'll need to itemize your deductions on your tax return rather than taking the standard deduction. This means the total sum of your itemized deductions should be greater than the standard deduction for your filing status. If this is not the case, you'd end up paying more in taxes.

For older people, it might be wise to calculate your taxes both ways. This can help you decide whether to itemize or take the standard deduction; since it increases after age 65, it becomes harder to reach the itemized deduction threshold.

Publication 502 issued by the IRS further details the medical and dental expenses that can be claimed on Schedule A.

Why Does the Standard Deduction Matter?

Standard deductions increase from year to year. For 2021, they're set at $12,550 ($12,950 in 2022) for single filers and those who are married but file separate returns, $18,800 ($19,400 for 2022) for those filing as heads of household, and $25,100 ($25,900 for 2022) for married taxpayers filing joint returns and qualifying widow(er)s.

You'd need a lot of medical costs to exceed these amounts. But note that when you itemize, you can include other costs outside of health care, such as mortgage interest, to add up to more than your standard deduction. You can compute the total of your itemized deductions using Schedule A, which you must submit when you file your tax return.

The Bottom Line

Before the standard deductions increased in 2018, only about one-third of taxpayers itemized their taxes. It's also estimated that less than 14% of taxpayers itemized in 2019 once the change took effect. Even with this reduction, there are some cases in which the medical expense deduction can be a helpful way to reduce your taxes.

If you're in retirement and your taxable income has lowered your AGI to a point where it allows you to take this itemized deduction, start saving receipts and adding up your medical bills. If you've spent a lot of money on health care, you may be able to save some money, or get some back, when you file taxes.

Article Sources

  1. Fidelity. "How to Plan for Rising Health Care Costs." Accessed Nov. 28, 2021.

  2. Internal Revenue Service. "Publication 502 (2020), Medical and Dental Expenses." Accessed Nov. 28, 2021.

  3. Internal Revenue Service. "Are My Social Security or Railroad Retirement Tier I Benefits Taxable?" Accessed Nov. 28, 2021.

  4. Internal Revenue Service. "Standard Mileage Rates." Accessed Nov. 28, 2021.

  5. U.S. Congress. "H.R. 1865 - Further Consolidated Appropriations Act, 2020." Accessed Nov. 28, 2021.

  6. Internal Revenue Service. "Topic No. 551 Standard Deduction." Accessed Nov. 28, 2021.

  7. Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2022." Accessed Nov. 28, 2021.

  8. Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2021." Accessed Nov. 28, 2021.

  9. Tax Foundation. "How Many Taxpayers Itemize Under Current Law?" Accessed Nov. 28, 2021.