Tax Implications of Medical Expenses

Here's some tax advice from the National Tax Advice Day web site on the tax implications of medical expenses:

There are three key areas where your health and medical-related expenses come into play with your tax return: deductions, disability and credits.

Deductions

Taxpayers can elect to deduct certain expenditures from adjusted gross income rather than claim the standard deduction. These expenditures, listed as itemized deductions, include medical expenses.

But in order to deduct your medical expenses, they must be more than 7.5 percent of your adjusted gross income, and of course you must be able to itemize. So, your medical expenses need to be fairly large in order to deduct them.

Medical expenses that can be itemized can include the cost of medical insurance, prescriptions, out of pocket medical expenses, and mileage to and from medical facilities. As far as your health care insurance premiums, they cannot be deducted if they are taken out of your paycheck as pre-tax dollars.

Actually, having your health insurance premiums taken out pre-tax may well be a greater benefit because of the AGI limitation on medical expense on the return. And, while "after tax" health insurance premiums are deductible, they are still subject to a 7.5 percent of adjusted gross income limitation (unless you're self-employed, in which case you may be able to deduct your health insurance premiums even if you don’t itemize).

Since medical bills are deductible only to the extent that they total more than 7.5 percent of your adjusted gross income, timing your payments may be the only way to garner a tax benefit from these costs. By now, you should have a good idea whether you'll pass the 7.5 percent floor. If it's doubtful, try to hold off paying any medical bills or scheduling medical exams and procedures until the following year, when they might have some tax-saving power.

On the other hand, if you are close to or already over the threshold, see what you can do to pump up the deduction. One sure way, of course, is to pay any outstanding medical bills, including health insurance premiums, by Dec. 31. Also, consider scheduling, being billed for, and paying for elective medical and dental work before the end of the year. The same goes if you need new glasses, contact lenses, dentures, a hearing aid, or modifications to a car to enable a handicapped person to drive.

You should ask a tax professional for specifics, but there are medical expenses you can claim that you may not be aware of, and some items that may seem like logical deductions but are not deductions. For example, you cannot deduct the expenses you pay using your employer's cafeteria plan or flexible spending arrangement.

You may be able to deduct some medical care expenses if they are necessary to a particular disease. For example, the cost of adult diapers would be deductible if your elderly parent needed them as a result of a disease, such as Alzheimer's.

Disability

If you are receiving disability payments, you could be required to pay taxes on all or a percentage of your disability payments, depending on the type of disability payment you're receiving and who pays the premiums.

Generally, ordinary disability income is not taxable to the extent that the taxpayer recipient paid the premiums. Amounts received that are related to premiums your employer paid are most likely taxable. Social security disability is taxed under the usual rules for social security. Workers’ compensation is not taxable.

If your adjusted gross income is below $25,000, you may be able to claim the credit for the elderly and disabled.

If you are caring for a disabled person, you could be eligible to claim the dependent care credit. Disabled individuals must be unable to care for themselves to qualify you for the credit. A disability is that which prevents an individual from engaging in any substantial gainful activity because of a medically determined physical or mental impairment that is expected to result in death, or that has lasted or is expected to last for a continuous period of not less than 12 months.

Credits

A key health-related credit is the Health Coverage Tax Credit (HCTC), a program that can help pay for nearly two-thirds of eligible individuals' health plan premiums.

The HCTC assists three very specific groups: TRA Recipients, ATAA Benefit Recipients, and Pension Benefit Recipients of the PBGC. If you fit into one of these groups, you may be eligible to receive the credit.

TRA recipients are people who receive a Trade Readjustment Allowance (TRA), including those individuals who are eligible for a TRA but have not used up their unemployment insurance (UI) benefits. ATAA benefit recipients are workers who are at least 50 years of age who receive a certain percentage of the wage differential between the wages of their previous, adversely-affected employment and their new full-time employment. And, PBGC recipients are those individuals who are at least 55 years old and receive pension benefits from the Pension Benefit Guaranty Corp., or who received a lump sum payment from the PBGC after Aug. 5, 2002. You may also qualify if you are at least 55 years old and you currently receive PBGC benefits as a survivor, a beneficiary, or as an alternate payee.

But you are not eligible for the HCTC if you are enrolled in a health plan maintained by your or your spouse's current or former employer that pays at least 50 percent of the cost of coverage. Any share of your premium that is paid by you or your spouse on a pre-tax basis is considered to have been paid by your employer and must be included as such when determining the percentage of employer coverage.

Also, you are not eligible Health Coverage Tax Credit if you are entitled to Medicare Part A or enrolled in Medicare Part B, are enrolled in the Federal Employees Health Benefits Program (FEHBP), Medicaid, or State Children's Health Insurance Program (SCHIP), or are entitled to health coverage through the U.S. military health system (this does not include health coverage received as a Veterans Affairs (VA) benefit.)

For tax-related questions, FMF recommends: H&R Block.  Do it yourself or have us do it.  It's never been easier.

Comments

[Lori]

I have a question on this (since you mentioned this =)) what if I am only like $500 to $900 dollars away from qualifying, is there a way that this years can be rolled into next years? Or does it start from zero once you begin the new year?

[JLP at AllThingsFinancial]

Lori,

FMF asked me to respond to your question.

I am not aware of a way in which you can roll deductions from one year to another. Since the deduction is based on anything that exceeds 7.5% of your AGI (line 37 or 38), you could lower your AGI by possibly contributing more to your 401(k) or take advantage of one of the deductions available on the front page of form 1040.

I hope this helps.

JLP

[Lori]

Thanks a bunch!!!

[Amanda]

Lets say my family income is $52,000 and we have nearly $19,000 in medical expenses. Not counting any other deductions, what percentage of that $19,000 can I expect to get back in my refund?

[FMF]

Amanda --

I suggest you consult your tax preparer or the IRS to see how you deduct your medical expenses specifically. You'll have a good amount to deduct -- you just need to be sure you do it correctly.

[karen riley]

My diability social security goes to my designed payee
What happens if my designated payee goes has a personal bankrupcy. What happens to my social security?