Many taxpayers leave money on the table because they don’t deduct all the medical expenses they are allowed. Medical expense deductions were tightened over the years, leading many people to believe they can’t deduct their expenses. But you can deduct medical payments as itemized expenses, and many people qualify for higher deductions than they realize, especially seniors and those who help out seniors.
To deduct medical expenses, you have to itemize expenses on Schedule A of the 1040. If you file one of the short forms or use the standard deduction, you can’t separately deduct medical expenses. When you itemize, the medical expenses that exceed 7.5% of adjusted gross income are deducted. You total all your medical expenses, and those that exceed the 7.5% floor are deductible. If your AGI is $50,000, medical expenses exceeding $3,750 are deductible.
With incomes down over the last couple of years, many people who couldn’t deduct their medical expenses before can deduct them now.
The definition of a deductible medical expense is broad. Any expense to diagnose, cure, mitigate, treat, or prevent a disease, and the cost of a treatment affecting any part or function of the body is a deductible medical expense. The expense must be primarily to alleviate or prevent a physical or mental defect or illness. Expenses that are merely beneficial to general health do not qualify, including vitamins, vacations, and the costs of regular exercise such as a gym membership.
Here’s a quick review of deductible medical expenses people frequently overlook.
– A weight loss program is deductible when prescribed by a physician to treat a specific illness or ailment, though it is not deductible when undertaken to improve general health.
– Smoking cessation programs, whether or not prescribed by a doctor, and the cost of prescription drugs to alleviate the symptoms of nicotine withdrawal are deductible.
– Nonelective cosmetic surgery when it promotes proper functioning of the body or prevents or treats an illness or disease.
– Dental work that is not purely cosmetic.
– Hearing aids and prescription eyeglasses including the cost of examinations and prescriptions.
– Medical services not provided by physicians, including those involving nontraditional treatments or healers. Such treatments include acupuncture, chiropractic, and Christian Science healing practices.
– Psychotherapy and psychiatric counseling.
– Transportation to and from medical treatment, including a standard mileage deduction at 16.5 cents per mile in 2010, tolls, and parking.
– Long-term care insurance premiums for qualified policies, with the maximum deduction determined by the insured’s age.
– Premiums for Medicare Part B and the Medicare Part D prescription drug epprograms.
– When paid by credit card, medical expenses are deducted in the year they are charged to the card.
– Capital expenditures and improvements for a home are deductible under certain conditions. The main purpose of the improvement must be medical care or treatment of a disease or medical condition. The expense is not deductible to the extent it increases the value of the home.
– Diagnostic devices such as blood sugar monitors.
– Laser eye surgery or radial keratotomy.
Some expenses people want to deduct as medical expense are not deductible under the tax law. Here are some of the frequently-denied deductions.
Cosmetic surgery that is medically unnecessary because its purpose is to improve appearance and does not treat an illness or disease or promote the proper functioning of the body.
Health club dues are deductible only to the extent that they pay for medically-prescribed weight loss classes or another specific medical condition. Amounts paid to improve general health or relieve mental or physical discomfort not related to a particular medical condition are not deductible.
There are more little-known ways to increase deductions for your medical expenses.
– You may be able to deduct a medical expense twice. You could purchase deductible medical equipment, such as a wheelchair or crutches. After you no longer need the equipment, you contribute it to a charity and deduct the fair market value of the item as a charitable contribution.
– Home health care expenses can be deductible. Deductible home care expenses include even simple tasks – such as blood pressure monitoring – performed by a licensed health care worker. But those who require home health care often require help with personal tasks such as meals, bathing, dressing, and bed-changing. Those costs are deductible only to those who are unable to perform two or more of the six activities of daily living and have a plan of care that specifies help with these tasks.
– Families can maximize the tax benefits of medical expenses if they can arrange to have the family member in the highest tax bracket pay the medical expenses and deduct them. A taxpayer can deduct a relative’s medical expenses when the taxpayer provided over half that person’s support during the year. IRS Publication 502 Medical and Dental Expenses lists the relatives that qualify and the expenses that count as support. (Call 800-TAX-FORM or check www.irs.gov.)
The taxpayer also might receive a bonus by being able to take a dependent exemption for the relative. To do that, the relative must have non-Social Security income less than the personal exemption amount, and there are other qualifications. Check IRS Publication 17 for details on the dependent exemption.
Suppose Rosie Profits is in a nursing home at a cost of $60,000 annually. (Please see the box on the next page for the rules on deducting nursing home expenses.) Rosie has income from Social Security and investment income that cover most of the cost, and the rest is paid from selling investments. Deducting the cost as a medical expense wipes out her tax bill, but she was in a low tax bracket to start.
What if Rosie’s adult son, Hi, is in a higher tax bracket? The medical expense deduction is much more valuable in the higher tax bracket. In addition, the deduction of the nursing home expenses should make the rest of the medical expenses of Hi’s family deductible because of the 7.5% floor on deductions.
Here’s how the numbers could work. Suppose Hi’s adjusted gross income is $250,000. He needs medical expenses of more than $18,750 to deduct any. If Hi pays all Rosie’s nursing home expenses, he’ll deduct $41,250. The medical expense deduction reduces Hi’s taxes by more than $16,000, and perhaps by more if it lets Hi deduct other medical expenses. Rosie could give Hi $44,000 annually to pay the nursing home expenses and still leave him whole. Rosie probably would have a tax bill of over $8,000 annually, leaving the family net savings of around $8,000 by restructuring it this way. If Hi has enough family members and Rosie makes a $13,000 gift to each of them each year, there would be no gift tax consequences. Otherwise, Rosie would need to file a gift tax return. There might not be a gift tax unless her lifetime estate and gift tax exemption already is used.
Suppose the nursing home resident cannot afford the expenses, and one child cannot afford to foot the bills alone. The resident has several children who together can contribute enough to pay the expenses. If they all contribute, however, no one qualifies to deduct the expenses. The solution is for the children to agree that one of them can take the deduction. If together they provide over half of the resident’s support for the year, they can designate one of them to deduct the expenses. The contributions made by the others can be adjusted to account for the tax savings received by one of them. Each of the children must sign a form that is filed with the return of the one taking the deduction.
Details of all aspects of deducting medical expenses are in IRS Publications 502 and 17. They are available free on the IRS web site or by calling 800-TAX-FORM.
March 2010. RW
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