Understanding medical deductions: Who can claim what

Medical bills can put a dent in your budget, but the silver lining is that you may be able to get a tax deduction in exchange for your expenses.

“The deduction is actually a lot broader than many people realize,” says Bhakti Shah, senior vice president and tax planning manager for wealth management firm Beacon Trust in Morristown, New Jersey. The IRS has compiled a long list of deductible items that covers everything from ambulance rides to X-rays.

At the same time, the tax code is set up in such a way that not everyone will be able to deduct qualified expenses. Why is that? Keep reading to learn everything you need to know about medical deductions.

What qualifies as a deductible medical expense?

Publication 502 from the IRS takes more than 10 pages to cover the various expense categories that can be deducted. It’s worth reviewing the publication, but broadly speaking, the IRS defines medical expenses as “primarily to alleviate or prevent a physical or mental disability or illness.”

“If the doctor told you (that) you needed to take your blood pressure every day, (a blood pressure monitor) would be a medical expense,” says Evan Morgan, certified public accountant and tax principal with accounting firm Kaufman Rossin in Ft. Lauderdale, Florida.

Other examples of deductible items listed by the IRS include the following:
• Inpatient and outpatient medical bills.
• Health insurance premiums.
• Home improvements made for purposes of accessibility.
• Prescription medications.
• Long-term care.
• Eyeglasses and vision care.

Only unreimbursed expenses are tax-deductible, so any bill covered by insurance, an employer or a health savings account won’t qualify. Plus, expenses must be medically necessary.

“They can’t be voluntary, cosmetic-type surgeries,” says Marianela Collado, CPA and senior wealth advisor for Tobias Financial Advisors in Plantation, Florida.

Generally speaking, over-the-counter medications and supplements also aren’t eligible. The IRS notes, “They don’t include expenses that are merely beneficial to general health, such as vitamins or a vacation.”

Medical deductions need to be itemized

“Once you’ve determined you have eligible expenses, then we go to whether you can actually deduct them,” Collado says.

Medical expenses are claimed on Schedule A, which allows taxpayers to itemize deductions for their federal income tax. However, only medical expenses in excess of 7.5% of someone’s adjusted gross income can be deducted on this form. For a taxpayer with an AGI of $100,000, that means only unreimbursed expenses in excess of $7,500 can be included on Schedule A.

Even if someone has enough medical expenses to include on Schedule A, that is no guarantee they will be able to deduct them. That’s because a person’s total itemized deductions – which can also include state and local taxes, mortgage interest and charitable gifts, among other things – need to exceed the standard deduction.

“In order for anyone to be able to deduct medical expenses, they have to be able to itemize their deductions,” Morgan says. But with the 2021 standard deduction set at $12,550 for individuals and $25,100 for married couples filing jointly, the number of people with enough expenses to itemize is limited.

Deducting expenses for non-dependents

Typically, you can only deduct expenses paid for yourself, your spouse or your dependents. “If you are paying medical expenses for someone else, that’s great but you may not be able to deduct them,” Collado says.

The IRS does allow people to deduct expenses for some qualifying relatives, though. Shah explains that the IRS will not consider someone your dependent if they file a joint tax return or if they earned more than $4,300 in gross income during 2020. However, if a person could be your dependent except for one of those reasons, you can deduct their medical expenses.

In this way, it may be possible for adult children to deduct the cost of care for their parents, should they provide more than half their support. “You just include (the expenses) and make sure you keep good records,” Shah says.

Avoid these medical deduction mistakes

Like all tax matters, medical deductions can be complex, and it’s always a good idea to take questions to a tax professional. You should also be sure to avoid these common mistakes:

Missing available deductions. If you’re not familiar with the tax code, you could miss some deductions. Health insurance premiums taken from paychecks and Medicare premiums withheld from Social Security benefits are two examples. “That gets overlooked sometimes because (people) aren’t writing a check,” Morgan says.

Not knowing your state’s rules. Even if you don’t have enough expenses to claim a federal tax deduction, “There may still be a benefit at the state level,” Shah says. For instance, New Jersey allows taxpayers to deduct unreimbursed medical expenses that exceed 2% of their income.

Poor recordkeeping. You don’t need to send documentation when claiming medical deductions, but keep copies of all receipts and billing statements. If you are audited, the IRS will want proof that you actually incurred the amount itemized. What’s more, good records will make it easier to calculate your deduction at tax time.

Health savings accounts: An alternative to consider

If you aren’t able to itemize federal deductions, you could see tax savings on medical expenses by using a health savings account. Contributions to these accounts are tax-deductible, the money grows tax-free and can be withdrawn tax-free for qualified medical expenses.

“That’s a good way to make lemonade out of lemons,” Collado says.

To open a health savings account, you’ll need an eligible high-deductible health insurance plan. Once you have that, individuals can contribute $3,600 to their HSA in 2021, while those with family plans can contribute $7,200. Money deposited in an HSA rolls over each year so it can be saved for future expenses.