Medical Expense Deductions and Tax Breaks

Tax Planning Tips for Reducing Taxes Using Medical Expenses

Pharmacist giving medicine to customer
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Medical expenses you've paid during the year – including many health insurance premiums – offer a veritable bounty of possible tax deductions and tax breaks. If they meet certain qualifications, you may be eligible for an itemized deduction for medical expenses, a tax-free reimbursement from a flexible spending account, a health reimbursement account or a health savings account.

The Itemized Deduction for Medical Expenses

Some of your medical expenses are tax deductible if you itemize.

If your total medical expenses exceed 10 percent of your adjusted gross income, you can claim the balance. A special exception exists for taxpayers who are age 65 or older, but only through the 2016 tax year – the tax return you would file on or before the April 18, 2017 deadline. The threshold is only 7.5 percent through December 31, 2016, but then it increases to 10 percent. 

Qualifying Medical Expenses

Generally speaking, a medical expense will qualify for an itemized deduction if it's paid for the diagnosis, cure, mitigation, treatment or prevention of a disease or condition affecting any part or function of the body. Qualifying expenses include: 

  • Costs for medical services from physicians, surgeons, dentists and other medical professionals;
  • Costs for medications prescribed by a medical professional
  • Costs for medical devices, equipment and supplies prescribed by a medical professional, such as eyeglasses
  • Costs for health and dental insurance premiums provided they are not reimbursed by your employer
  • Costs for long-term care and long-term care insurance
  • Transportation and lodging costs for traveling to a health care facility, including mileage at a rate of 17 cents per mile as of 2017.

Over-the-counter treatments, nutritional supplements, vitamins and first aid supplies don't qualify unless they're prescribed by a medical professional.

Controlled substances such as cocaine and marijuana are not tax deductible even if they're prescribed.

Flexible Spending Accounts (FSAs)

Some employees may be eligible to set up medical flexible spending accounts (FSAs) through their employers. FSA plans let employees to save pre-tax money through payroll deductions, then submit various medical expenses to the account for reimbursement. You can contribute up to $2,600 a year per employer as of 2017, and if you're married, your spouse can contribute up to $2,600 to your FSA as well. Eligible medical expenses include co-pays, deductibles, prescriptions and some over-the-counter medications. The drawback is that you must use the money within the year – you can't save it up toward a future healthy calamity. 

Health Reimbursement Accounts (HRAs)

Some employers offer their workers health reimbursement accounts. The employer will effectively reimburse an employee for certain qualified medical expenses. The reimbursements are tax-free. Your employer contributes to a plan to which you can submit your requests for reimbursement, and unlike with an FSA, the money can roll over into subsequent years if you don't use it. 

Health Savings Accounts (HSAs)

A taxpayer can set up a health savings account (HSA) either on his own or through a group plan with his employer.

Like FSAs, HSAs are pre-tax savings accounts. Unlike FSAs, health savings accounts do not have a "use-it-or-lose-it" feature for accumulated savings. Health savings account holders can use their savings funds to pay for medical expenses on a tax-free basis. You must have a high-deductible health insurance plan to qualify. The HSA helps to defray the policy's out-of-pocket costs. 

Tax Planning for Medical Expenses

It's often better to use a pre-tax savings plan to pay for out-of-pocket medical expenses rather than take an itemized deduction. Because FSA, HSA and HRA plans hold pre-tax money, any medical expenses paid out of these plans are 100-percent deductions where the itemized deduction is, at best, only partially tax deductible.

Anyone whose total medical expenses for the year are less than 10 percent of his adjusted gross income won't be able to claim the deduction at all, and those whose standard deduction amounts to more than their total itemized deductions would end up paying taxes on more income than they have to if they itemized.