Health Insurance and Medical Expenses Are Tax Deductible for Retirees
Many medical and dental expenses are deductible
You've finally reached that milestone. You've retired, but now your medical expenses are increasing—that's a natural result of aging. It's estimated that the average couple over age 65 will spend $390,000 on health care in retirement. This figure is expected to increase by about 2% or more each year.
A silver lining might be found in potential income tax deductions for these extra expenses. Most medical and dental expenses are deductible.
Deductible Medical Expenses For Retirees
The medical expense tax deduction covers the cost of insurance premiums, long-term care insurance premiums, and Medicare. Virtually all medically necessary costs prescribed by a physician are tax-deductible.
This means that if your doctor told you to add a humidifier to your home heating and air-conditioning system to relieve your chronic breathing problems, the device could be at least partially deductible. Travel expenses to and from medical treatments are deductible.
You are able to deduct 20 cents per mile for medical needs travel. The cost of in-home care can be deducted if you're chronically ill and the care is prescribed by your doctor.
Deductible uninsured medical costs can include everything from an extra pair of eyeglasses, an order of contact lenses, dentures, hearing aids, or prosthetic limbs. Substance abuse treatment costs, such as alcohol and drug rehabilitation programs, are potential itemized deductions, as is laser vision corrective surgery.
Nondeductible Retiree Medical Expenses
The primary exclusions are non-prescription, over-the-counter drugs and expenses which are more cosmetic in nature, like teeth whitening. Supplements are deductible if they're recommended by a physician for a specific condition.
You can't deduct the costs of toiletries or elective procedures that are not required to improve your health. Unfortunately, a country club membership isn't deductible, even if your doctor told you to walk more.
You can't deduct any payment you make which is reimbursed or paid for by insurance. Premium payments to your insurance company must be made from after-tax income, making them nondeductible.
You Have to Itemize
You should itemize to claim a medical expense deduction. This means the total of your itemized deductions should exceed the standard deduction for your filing status or you'll actually be paying more in taxes.
This can often be a challenge for older Americans. Your standard deduction increases when you hit age 65 and/or if you're blind. This can make it harder to reach the deduction threshold.
Additionally, standard deductions have increased dramatically, thanks to the Tax Cuts and Jobs Act (TCJA) of 2017. They're set at $12,000 for single filers and those who are married but file separate returns, $18,000 for head of household filers, and $24,000 for married taxpayers filing joint returns, as well as qualifying widow(er)s.
You'd need a lot of medical expenses to exceed these amounts, but you can include other itemized deductions to potentially add up to more than your standard deduction. You can compute the total of your itemized deductions using Schedule A, which must be submitted with your tax return when you file it.
Expenses Must Exceed 10% of Your AGI
You can only deduct the portion of your medical expenses that exceed 10% of your adjusted gross income (AGI). This rule has shifted and changed a bit over the years.
The threshold was set at 7.5% until 2013 when Congress increased it to 10%—but not for those age 65 or older. Seniors could continue to deduct medical expenses that exceeded 7.5% of their AGIs through the end of 2016.
The TCJA went into effect in January 2018. This tax law retroactively reset the threshold to 7.5% for the tax years 2017 through 2018 for everyone, regardless of age. Unfortunately, the threshold is currently set back at 10% for everyone.
Here's where your presumably lower income during retirement is a potential asset. If your AGI is lower, the threshold that your medical expenses must exceed lowers, providing you with a tax benefit. For example, you'd need expenses in excess of $5,500 on an AGI of $55,000, but you'd need at least $7,500 in expenses if your AGI was $75,000.
The Bottom Line
Only about one-third of taxpayers itemized deductions before the significant increase in standard deductions became effective in 2018. There are situations 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 adding up those medical bills and receipts.
Publication 502 issued by the IRS further details the medical and dental expenses that can be claimed on Schedule A.