Retirement offers a well-deserved opportunity to reap the rewards of a lifetime of hard work. Being able to enjoy retirement without financial worries takes some financial fine-tuning and expense cutting, though one area where expenses are likely to increase is health care costs. It's estimated that the average couple over age 65 will spend $295,000 on health care in retirement. This figure typically increases with each year.
Potential income tax deductions for medical expenses can be a powerful tool in offsetting the high cost of health care for retired people. You may be surprised at the number of medical and dental expenses that are deductible.
- Medical expenses that exceed 7.5% of your adjusted gross income can be deducted for tax purposes.
- Your out-of-pocket insurance premiums are considered eligible expenses.
- Track your spending on treatment-related travel and any purchases called for by a healthcare provider.
- You must itemize your taxes to get these deductions.
Deductible Medical Expenses for Retirees
You can deduct the amount of your medical and dental expenses that exceed 7.5% of your adjusted gross income (AGI). Along with direct medical expenses, deductions allowed include 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 also deductible at 17 cents per mile. The cost of in-home care can be deducted if you're chronically ill and the care is prescribed by your doctor.
Deductible medical costs not typically covered by insurance can include everything from an extra pair of eyeglasses to 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.
You may recall medical and dental expenses needing to exceed 10% of your adjusted gross income to deduct them from your taxes in previous years, but this is no longer the case. The current threshold for medical deductions is 7.5%.
Nondeductible Retiree Medical Expenses
The primary deduction exclusions are non-prescription, over-the-counter drugs and expenses that are more cosmetic in nature, like teeth whitening. Dietary 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 gym membership isn't deductible, even if your doctor told you to get more exercise.
You also can't deduct any expenses you incur that are reimbursed or paid for by insurance. Health insurance premium payments made via an employer-sponsored health plan are not deductible because those payments are made with pre-tax income.
You Must Itemize to Receive 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 of your itemized deductions should exceed the standard deduction for your filing status, or you'll actually be paying more in taxes.
For older Americans, the decision to itemize or not should be carefully considered and calculated both ways. This is because the standard deduction increases when taxpayers reach age 65, which can make it harder to reach the itemized deduction threshold.
Standard deductions increase from year to year. Currently, 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 expenses to exceed these amounts, but you can include other itemized deductions, such as mortgage interest, 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.
Publication 502 issued by the IRS further details the medical and dental expenses that can be claimed on Schedule A.
The Bottom Line
Only about one-third of taxpayers itemized deductions before significant increases in standard deductions became effective in 2018, and it's estimated that less than 14% of taxpayers itemized in 2019 once the change took effect. Even with this reduction, 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.