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 $295,000 (per couple) on health care during retirement. This figure is also on the rise, growing higher with each passing year.

One way that retired people can offset the high costs of health care is through income tax deductions. If you deduct all of 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, selling your home, etc.) you may be able to reduce your tax liability with the medical deduction. 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 17 cents per mile. The cost of in-home care can be deducted if you have a severe or chronic illness, and if the care is prescribed by your doctor.

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.

Prior to 2018, seniors 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 costs of treatments that are more cosmetic in nature, like teeth whitening. You might be able to deduct the cost of dietary supplements if they're recommended by a doctor for a specific condition, but this is rare.

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.

Any costs that are reimbursed, or paid for by your insurance, cannot be deducted on your taxes. This makes sense because after all is said and done, some other party paid for 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 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 how to file, whether itemizing or taking the standard deduction. This is because the standard deduction increases after you reach age 65, which can make it harder to reach the itemized deduction threshold.

Why Does the Standard Deduction Matter?

Standard deductions increase from year to year. For 2021, they're set at $12,400 for single filers and those who are married but file separate returns, $18,650 for head of household filers, and $24,800 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 with your tax return when you file it.

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

The Bottom Line

Before the standard deductions increased in 2018, only about one-third of taxpayers itemized. And it's 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 those medical bills. If you've spent a lot of money on health care, you just may be able to save some money, or get some back, when you file taxes.