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How to Maximize Medical Expense Deductions

Last update on: Jun 22 2020

Medical expense deductions are the elusive goal of many taxpayers. With higher medical expenses than others, retirees are the taxpayers most likely to be able to deduct their medical expenses. They can maximize those deductions by knowing the rules.

The definition of deductible medical expenses is broad. Qualified medical expenses, however, can be deducted only if the taxpayer itemizes deductions on Schedule A. Those who take the standard deduction cannot separately deduct medical expenses. Even for itemizers, only medical expenses that exceed 7.5% of adjusted gross income are deducted. If AGI is $50,000, only medical expenses exceeding $3,750 are deductible. Here are some tips for maximizing tax breaks from medical expenses.

  • Sometimes a medical expense can be deducted twice. Suppose you purchase a medical device such as a wheelchair or crutches. That is a deductible medical expense. Then, you recover or your needs change; you no longer use the device. You can contribute that medical device to a charity and deduct the fair market value of the item as a charitable contribution.
  • In recent years the IRS allowed dedu-ctions for expenses that previously weren’t deductible. The cost of 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 (Rev. Rul. 99-28). A weight loss program also might be deductible if it is prescribed by a physician to treat a specific illness or ailment, though it is not deductible when undertaken to improve general health. There are a host of expenses such as these that people do not realize are deductible. Taxpayers with questions about which medical expenses are deductible should review IRS Publication 502, available on the IRS web site at Consult with a tax advisor for significant or borderline expenses.
  • 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. The cost is 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. Check IRS Publication 502 for details of deductible home care and establishing a plan of care.
  • When staying in a nursing home or assisted living facility at least some of the expenses usually are deductible. The amount of the deductions depends on the circumstances.When the primary reason for residing in a nursing home is one’s physical condition and the availability of 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 costs attributable to medical or nursing care are deductible. Payments for food, lodging, and other personal expenses are not deductible in that case. Most nursing homes give itemized bills for their services that are helpful in determining the amount of deductible expenses. You should request one if it is not given.

    Deducting the cost of an assisted living facility is trickier, because assisted living primarily is a residential facility not a medical facility. Deductions are most limited for those 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 related to nursing care or other health care. These should be itemized in the bill.

    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 your physician, a nurse, or a physical therapist.

  • 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

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. 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 expense should make the medical expenses of Hi’s family deductible.

Here’s how the numbers could work. Suppose Hi’s adjusted gross income is $250,000. He needs medical expenses more than $18,750 to deduct anything. 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. It is greater if Hi has other medical expenses to deduct. 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 $12,000 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. 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 how to qualify for and implement this strategy are in IRS Publications 17 and 502.



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