Most taxpayers can claim medical expenses that exceed 7.5% of their adjusted gross incomes (AGIs), subject to certain rules. The threshold was 10% from 2013 through 2016, then along came a flurry of federal legislation, dropping that 10% threshold before increasing it, and finally dropping it again.
The deduction was subject to a 7.5% threshold through the end of 2020, the tax return you'd file in 2021. Then, in December 2020, further legislation made the 7.5% threshold permanent.
The bottom line is that the medical expense deduction is once again taxpayer-friendly, but numerous rules apply to what you can deduct and when.
The Effects of Federal Legislation
The threshold for deductible medical expenses was supposed to remain at 10% in 2016, but the Tax Cuts and Jobs Act (TCJA) dropped the threshold back to 7.5% for 2017 and 2018. You could claim the deduction for medical expenses that exceeded just 7.5% of your AGI in those years.
The medical expense deduction was supposed to go back up to 10% of a taxpayer's AGI beginning in January 2020, but the Taxpayer Certainty and Disaster Tax Relief Act of 2019, signed into law by former President Trump on Dec. 20, 2019, prevented that. Section 103 of Title I of this law provides that "7.5%" should replace "10%" for all tax years beginning before Jan. 1, 2021.
So we were back to 7.5% for tax years 2019 and 2020, then the Omnibus Appropriations Law, signed by former President Trump in December 2020, made the 7.5% threshold permanent.
The IRS defines qualifying medical expenses as those related to the "diagnosis, cure, mitigation, treatment, or prevention of a disease or condition affecting any part or function of the body." According to Internal Revenue Code section 213(d)(1), a medical expense must satisfy one of the following conditions to be tax-deductible:
- Any medical services from physicians, surgeons, dentists, and other medical professionals related to the diagnosis, cure, mitigation, treatment, or prevention of disease
- Any costs for medications prescribed by a medical professional
- Any costs for medical devices, equipment, and supplies prescribed by a medical professional, such as eyeglasses
- The treatment must affect any structure or function of the body
- Expenses associated with transportation to and from medical care qualify
- Long-term care services qualify
- Insurance for medical care or long-term care are covered
Expenses that are merely beneficial to general health, such as vitamins, aren't covered, but treatments and prescriptions provided by physicians, surgeons, dentists, chiropractors, psychologists, psychiatrists, and similar medical professionals can be deducted.
Medical-Related Transportation Costs
You can deduct the cost of transportation to and from a health care facility if you can’t receive medical care without traveling. The following expenses can be included in the cost of medical-related transportation:
- Bus, taxi, train, or plane fares
- Ambulance service
- Transportation expenses of a parent who must go with a child who needs medical care
- Transportation expenses of a nurse or other person who can give injections, medications, or other treatment required by a patient who is traveling to get medical care, and is unable to travel alone
- Transportation expenses for regular visits to see a mentally ill dependent, if these visits are recommended as a part of treatment
You can deduct the miles using the standard mileage rate for medical purposes if you travel by car. It's 16 cents per mile in 2021, down from 17 cents in 2020. You can add the cost of parking and road tolls to this rate.
Who Can Receive Treatment?
You can deduct medical expenses paid for yourself, your spouse, and your dependents. You might also be able to deduct expenses for someone you don't actually claim as your dependent, but you could have done so except for any of the following circumstances:
- You didn’t claim your child as a dependent because of the rules for children of divorced or separated parents.
- You didn’t claim an individual as a dependent on your return because that person earned $4,300 or more in gross income as of 2020, or because they filed a joint return.
- You didn’t claim a person as a dependent on your return because that person could be claimed as a dependent on someone else's return.
A taxpayer can deduct medical expenses for their child even if the child's other parent claims them as a dependent. In this situation, each parent can deduct the medical expenses they personally paid on behalf of the child.
The Deduction and Your AGI Threshold
You can calculate the 7.5% rule by tallying up all your medical expenses for the year, then subtracting the amount equal to 7.5% of your AGI. For example, if your AGI is $65,000, your threshold would be $4,875, or 7.5% of $65,000. You can find your AGI on line 11 of your 2020 Form 1040.
Your deduction would therefore be $5,125—the balance over that $4,875 threshold—if you had $10,000 in qualified medical expenses during the tax year. Unfortunately, you don't get to claim the full $10,000, but this is still a lot better than the 10% rule that was in place in 2016.
You Must Itemize to Claim the Deduction
You must itemize your deductions to claim medical expenses. This means you must complete and file Schedule A with your tax return. It could be worth your while if you're eligible to claim several other itemized deductions as well, so they all add up to more than the year's standard deduction. This can be a bit of a stretch, however, after the passage of the TCJA.
You can't claim the standard deduction and itemize, too—it's one or the other.
The TCJA nearly doubled standard deductions for all taxpayers, and they’re adjusted annually to keep pace with inflation. They are:
- $12,400 in 2020 to $12,550 in 2021 for single taxpayers and married taxpayers who file separate returns
- $18,650 in 2020 to $18,800 in 2021 for head-of-household filers
- $24,800 in 2020 to $25,100 in 2021 for married taxpayers filing jointly
You'd pay taxes on more income than you have to if you don't claim the standard deduction and if you don't have itemized deductions that total more than the applicable standard deduction amount.
Medical expenses can be deducted on line one of the 2020 Schedule A, if it turns out that itemizing is in your best interest. Complete lines two and three of Schedule A to calculate your threshold limitation on medical expenses. Lastly, line four shows the deductible portion of what you paid.
Pre-Tax Expenses Aren't Deductible
Only medical expenses that aren’t reimbursed by your insurance can be included in the medical expense deduction. For example, say you have a prescription medication that costs $50, and your insurance company pays $20, while you have a copay of the remaining $30. With the medical expense deduction, you can deduct only the $30 that you paid out of pocket.
Similarly, any medical expenses paid from a flexible spending account, a health savings account (HSA), or a health reimbursement arrangement aren't included in the itemized deduction for medical expenses. These accounts already provide a tax advantage, and you can't double dip.
Special Rules for Some Health Insurance
You can deduct premiums for health, dental, and vision care insurance, but only if the premiums are paid with after-tax dollars. Those who have group insurance through their employers usually pay these premiums with pre-tax dollars.
Medicare Part A premiums can be deducted, but only if a taxpayer isn't covered under Social Security and is voluntarily enrolled in Medicare Part A. Medicare Part B premiums and Medigap premiums can be deducted. Medicare Part D prescription drug insurance premiums can be deducted, as well.
The Bottom Line
You can only deduct medical expenses in the year you paid them, although payment can be made by cash, check, or credit card. This is the case even if medical services were provided in a different year, such as if you underwent treatment in December 2020 but you pay the bill in January 2021. You would then claim the deduction on your 2021 tax return when you file it in 2022.