Medical Expense Deductions and Tax Breaks for the 2018 Tax Year
Medical expenses you've paid during the year, including some health insurance premiums, offer a bounty of possible deductions and breaks at tax time.
You might be eligible for an itemized deduction for medical expenses in the 2018 tax year if you meet certain qualifications. Or, you might consider a tax-free reimbursement from a flexible spending account, a health reimbursement account, or a health savings account.
The Itemized Deduction for Medical Expenses
Many of your medical expenses are tax deductible if you itemize deductions rather than claiming the standard deduction. If your total medical expenses exceed 7.5 percent of your adjusted gross income (AGI) for the 2018 tax year, you can claim a deduction for the balance.
It used to be that you could only deduct the portion of your expenses that exceeded 10 percent of your AGI, but the Tax Cuts and Jobs Act (TCJA) changed that, at least temporarily. The new tax law reduced the threshold retroactively for 2017 and extended the reduction forward through 2018. The percentage isn't set to increase back to 10 percent until the 2019 tax year.
This reduced threshold can result in a larger deduction because more of your expenses will be deductible.
Qualifying Medical Expenses
The Internal Revenue Service (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."
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, as long as they're 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 18 cents per mile as of 2018
Over-the-counter treatments, nutritional supplements, vitamins, and first aid supplies don't qualify unless they're prescribed by a medical professional. The IRS offers a free tool that helps you figure out if you can deduct your medical expenses if you're unsure.
Tax Planning for Medical Expenses
It may be beneficial to use a pre-tax savings plan to pay for out-of-pocket medical expenses than to take an itemized deduction, particularly in 2018. That's because TCJA nearly doubled the standard deduction for all filing statuses beginning in tax year 2018. You may not want to give that up, even with the change to a 7.5-percent AGI threshold. Itemizing wouldn't be worth your while if your overall itemized deductions don't exceed the standard deduction you're entitled to claim.
Standard deductions for the 2018 tax year are $12,000 for individuals, $24,000 for married taxpayers who file jointly, and $18,000 for those who qualify as head of household. If the total of all your itemized deductions doesn't exceed these amounts, you're just giving the IRS money that you don't have to.
Any medical expenses paid out of flexible spending accounts (FSAs), health savings accounts (HSAs), and health reimbursement accounts (HRAs) are taken tax-free, and thus, are considered 100 percent deductible. The itemized deduction is, at best, only partially tax deductible because you can only deduct the portion that's more than the 7.5 percent of your AGI. And anyone whose total medical expenses for the year are less than 7.5 percent of their AGI won't be able to claim the deduction at all.
Flexible Spending Accounts
Some employees might be eligible to set up medical flexible spending accounts through their employers. FSA plans let employees save pre-tax money through payroll deductions then submit various medical expenses to the account for reimbursement.
You can contribute up to $2,650 a year per employer as of 2018. Your spouse can contribute up to $2,650 to your FSA as well if you're married. 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 your contributions up toward a future health calamity.
Health Reimbursement Accounts
Some employers offer their workers health reimbursement accounts. The employer will reimburse an employee for certain qualified medical expenses, and the reimbursements are tax-free.
Your employer contributes to a plan to which you can submit your requests for reimbursement. Unlike with an FSA, there is no limit to the amount of money that your employer contributes, and the money can roll over into subsequent years if you don't use it in the same calendar year.
Health Savings Accounts
Taxpayers can set up health savings accounts either on their own or through a group plan with their employer. Like FSAs, HSAs are pre-tax savings accounts. Unlike FSAs, health savings accounts don't have a "use-it-or-lose-it" feature for accumulated savings. They carry forward to cover expenses in future years.
Health savings account holders can use their savings funds to pay for medical expenses on a tax-free basis, but they must have a high-deductible health insurance plan to qualify. The HSA helps to defray the policy's out-of-pocket costs.
Contribution limits in the 2018 tax year are $3,450 or individuals and $6,900 for families. You're entitled to an extra $1,000 "catch-up" contribution if you're 55 or older.