Deducting Medical Expenses

Many people believe that they’re no longer able to deduct medical expenses. They don’t even track their expenses or enter them on their income tax returns. That can be a costly mistake. Medical insurance covers fewer expenses each year, and more people would save taxes by deducting medical expenses than realize it.

Congress did make deducting medical expenses more difficult in the 1980s, and only a small percentage of people deduct the expenses on their tax returns. But I believe many people are leaving money on the table by not tracking their medical expenses and trying to deduct them.

Here are the basic rules for deducting medical expenses.

Medical expenses are deductible only when you itemize expenses on Schedule A. To do this all your deductible itemized expenses together need to exceed the standard deduction. People with mortgages on their homes are likely to be able to itemize deductions. In many states, real estate taxes or income taxes are high enough to push itemized expenses above the standard deduction amount. The standard deduction is $7,250 for unmarried taxpayers 65 or older in 2011 and $13,900 for a married couple filing jointly when each is 65 or older. (Subtract $1,150 for married couples and $1,450 for singles when no one is age 65 or over.)

Also, only the unreimbursed qualified medical expenses that exceed 7.5% of adjusted gross income are deductible. You list all your qualified, unreimbursed medical expenses on Schedule A, and then subtract 7.5% of your AGI. The remainder is the amount you deduct with the rest of your itemized expenses.

Qualified medical expenses are broadly defined as any expense incurred to cure or mitigate a disease or to affect a condition of the body. Many people lose deductions, because they don’t realize how many expenses qualify for deductions. In this visit we discuss some expenses commonly overlooked by people in my members’ demographic.

One item people frequently overlook is medical insurance premiums, including Medicare premiums for Part B, Part C, Part D, and supplemental, or Medigap, plans. One reason people overlook these premiums is many are withheld from their Social Security benefits. For employees, their share of insurance premiums is withheld from their paychecks.

Long-term care insurance premiums also are deductible when they are for qualified policies, up to a limit specified by the tax code. Your insurer can tell you if the policy is tax-qualified. The deduction limits for 2011 are $3,390 for those ages 61-70 and $4,240 for those over 70. For other ages, the limits are available in the tax return instructions and on the IRS web site at www.irs.gov.

I suspect for many retirees Medicare premiums alone are enough to exceed the 7.5% of AGI floor for many taxpayers and could be enough to push itemized deductions above the standard deductions.

Here are some other medical expenses that often are overlooked.

You might be able to deduct medical expenses paid on behalf of a relative. The relative must qualify as a dependent, which means you must provide over half of his or support. The relative doesn’t have to live with you. So, if you’re helping with the medical expenses of a parent, sibling, or child (including in-laws and step relatives), you might be able to deduct those expenses. Check IRS Publications 17 and 502 for details. They available free on the IRS web site at www.irs.gov.

The deductibility of long-term care expenses, such as nursing home and assisted living care, depend on the reasons for residing in the facility and the care received.

When the primary reason for residing in a nursing home is one’s physical condition and the need for readily available medical care, the entire cost of the nursing home is deductible. But if medical care is not the primary reason for residing in the nursing home, if the resident needs primarily custodial care, only the specific costs attributable to medical or nursing care are deductible.  Payments for food, lodging, and other personal expenses are not deductible in that case. 

Deducting the cost of an assisted living facility or home care is trickier, because assisted living primarily is a residential facility not a medical facility, as of course home care also is. Deductions are limited the most for residents who can perform at least five of the six activities of daily living (eating, toileting, transferring, bathing, dressing, and continence). These individuals deduct only the portion of the costs that are directly for nursing care or other health care.

But when the assisted living resident cannot perform two or more of the activities of daily living, the entire cost of the facility can be deducted if the resident has a plan of care in place. A plan of care can be drawn up by a physician, nurse, or physical therapist.

In one court case a patient was chronically ill due to dementia and her doctor believed caregivers were necessary around the clock for medical reasons as well as safety. Because the patient had a plan of care in place and her doctor believed the caregivers were necessary because of her diminished capacity, the Tax Court held that the payments to the caregivers were deductible as medical expenses. (Estate of Lillian Baral, 137 T.C. No. 1, 2011)

A long-term care provider usually itemizes bills so that you can see which expenses are for medical care and personal care.

Expenses provided by caregivers at the patient’s home, including care provided by relatives, can be deductible. The care must be medically necessary or due to medical conditions. When a relative provides the care, there must be a written agreement describing the care that will be provided and the compensation for it. The pay must be reasonable for the care provided, and the person paid must be qualified to give the care. Without a written agreement spelling out the details, the IRS will assume that a relative providing care is doing so without expectation of payment. (Estate of Olivo v. Commissioner, T.C. Memo. 2011-163)

In some cases a person is able to deduct expenses he or she didn’t pay. A daughter had significant medical expenses. Her mother paid them for her. The daughter was not the mother’s dependent, so the mother couldn’t deduct them. The daughter deducted them, and the Tax Court allowed the deduction. The payments were intended as gifts to the daughter, so she was entitled to the deductions as though she paid the expenses herself after receiving cash gifts from her mother. (Lang v. Commissioner, T.C. Memo 2010-286)

Families might want to use strategies such as this to ensure that someone in the family is able to deduct medical expenses.

There is a range of out-of-pocket, unreimbursed expenses that add to your deductible medical expenses. These include dental and vision expenses that aren’t covered by insurance (including Medicare), co-payments or coinsurance, and deductibles. Travel to receive medical care also is deductible. Almost any expense for something provided by a licensed medical provider that is non-cosmetic and to cure or mitigate a disease or affect a condition of the body is deductible.

Sometimes a person goes to adult day care. This is not medical care, but different tax breaks might be available when the person going to day care is the dependent of another taxpayer. When the taxpayer supporting the dependent is employed, a flexible spending account that reimburses dependent care might be available. The account allows an employee to allocate a portion of salary to the FSA, which then can be used to reimburse, tax free, qualified dependent care expenses. Check with your employer to see if this option is available and what the requirements are.

If an FSA isn’t available, a working taxpayer who is paying for the day care might be able to claim the dependent care tax credit. The expenses have to be necessary to allow the taxpayer (and a spouse if married) to work. The dependent’s gross income can’t exceed the personal exemption amount ($3,700 in 2011), and other conditions must be met. See IRS Publication 503 for more details. It’s available free at www.irs.gov.

RW January 2012.