It is more important than ever to track your retirement medical expenses and know which qualify for tax deductions.
The ability to deduct medical expenses was restricted by the Tax Cuts and Jobs Act (TCJA) in several ways. The standard deduction was doubled. You deduct medical expenses only if you itemize expenses on Schedule A instead of taking the standard deduction, and you itemize only when the total itemized expenses exceed the standard deduction. That’s much less likely after the standard deduction was doubled.
In addition, several itemized expense deductions were reduced or eliminated. Again, that makes it much less likely that itemized expenses will exceed the standard deduction.
Another restriction that was in place before the TCJA is that qualified medical expenses are deductible only after they exceed 10% of adjusted gross income (AGI). Also, only out-of-pocket expenses, not those reimbursed by insurance, count toward deductions.
Suppose Max Profits has AGI of $80,000 and $15,000 of deductible medical expenses. If Max itemizes expenses, the floor for the deduction is 10% of $80,000, or $8,000. Subtracting $8,000 from Max’s $15,000 of medical expenses leaves $7,000. Max can deduct $7,000 of medical expenses if he itemizes expenses.
The requirement to itemize expenses and the 10% floor intimidate a lot of people. Many taxpayers don’t even track their medical expenses, because they assume they won’t be able to deduct them.
Many retirees don’t know how comprehensive the medical expense deduction is, so they shortchange themselves at tax return time. Knowing which medical expenses are deductible and tracking your medical spending each year makes it more likely your itemized expenses will exceed the standard deduction and be deductible.
Also, even someone who typically has low annual medical expenses might have significant medical expenses one year that makes all the year’s medical expenses deductible.
You also can plan some medical spending to maximize deductions. Elective medical treatments can be delayed to a year in which you incur high medical expenses. Then, you might exceed the threshold and be able to deduct some of them.
You may deduct qualified medical expenses paid on behalf of you, your spouse and any other dependents. You might be able to deduct the medical expenses of someone who doesn’t live in your home, which I’ll discuss in an upcoming issue.
A qualified medical expense is any expense incurred to cure or mitigate a disease or to affect a condition of the body. That covers more expenses than most people realize.
For example, the IRS recently ruled that part of the cost of genetic-testing or DNA services qualifies as a deductible medical expense. This ruling also might mean part of the cost of a smart watch qualifies as a deductible medical expense. See our September 2019 issue for details.
Medical insurance premiums are deductible, including premiums for Medicare Parts B, C and D, as well as for Medicare supplement, or Medigap, policies. People often forget they paid these premiums, because they’re usually deducted from Social Security benefits.
Premiums for tax-qualified long-term care policies also are deductible up to a limit determined by the IRS each year.
Of course, your out-of-pocket costs such as co-payments, coinsurance and deductibles for qualified medical care qualify. So do dental and vision expenses that aren’t covered by insurance. Hearing aids and related costs are deductible.
The cost of travel to receive medical care is deductible. This is especially important if you travel out of town to receive treatment. But you also can take the standard mileage deduction for driving your vehicle to receive medical care locally, as well as the cost of taxis and public transportation.
Medical treatment doesn’t have to be provided by an M.D. to be deductible. The expense of any treatment or procedure provided by a licensed medical provider is deductible when provided to cure or mitigate a disease or affect a condition of the body.
Here are other medical expenses that are deductible but frequently overlooked by taxpayers.
• A weight loss program is deductible when prescribed by a physician to treat a specific illness or ailment, but not 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 is deductible 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 non-traditional treatments or healers, including acupuncture, chiropractic and Christian Science healing practices.
• Psychotherapy and psychiatric counseling.
• 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.
Health club dues are deductible only to the extent they pay for medically prescribed weight loss classes or to relieve or treat 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.
An expense that’s not deductible is 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.