Medical Expenses
Posted on August 1, 2008
Filed Under Deductions, Federal Income Tax
It is no accident some writers use the adjective “extraordinary” to describe medical expenses as this cluster of costs qualifies as an itemized deduction only if it totals more than a hefty 7.5% of adjusted gross income (AGI). A single taxpayer reporting in 2007 AGI of $75,000 and paying $5,600 in medical expenses and $6,000 for the miscellaneous expense of job-related legal fees would be in the unhappy situation of being able to itemize (legal fees alone, even after subtracting the 2% of AGI floor for miscellaneous expenses, are greater than the $5,350 standard deduction amount) yet unable to deduct medical expenses because they fall short of the 7.5% AGI floor or $5,625 ($75,000 x 7.5%). Although not subject to phase out, medical expenses fall under the iron sway of the alternative minimum tax and its harsher 10% AGI floor for high income taxpayers.
However, there is good news for the self-employed: health insurance premiums for the business owner and his or her spouse and dependents are not subject to the 7.5% AGI floor. Instead, these premiums are 100% deductible. But an individual is not required to be self-employed in order to take an above the line deduction for certain medical expenses. For example, the unreimbursed cost of a checkup required by an employer is a miscellaneous expense that is deductible but subject to a 2% AGI floor, but an employee required to pay for and pass a physical exam as a condition of continued employment may take an above the line deduction for this expense.
What are deductible medical expenses? Paraphrasing the Internal Revenue Code, deductible medical expenses are unreimbursed amounts paid for diagnosing, mitigating, treating, and preventing disease. The cost of a procedure or treatment affecting the body’s structure or function is also deductible.
A taxpayer can deduct medical costs for a dependent even if the dependent doesn’t qualify for the regular dependency exemption. In other words, the restrictions on claiming individuals as dependents are relaxed for medical deductions:
- A taxpayer who provides more than 50% of a dependent’s support can claim a deduction for dependent’s medical expenses even if dependent fails the gross income test, that is, earns more than the exemption amount ($3,400 in 2007);
- The ban against listing a joint return filer as a dependent is lifted;
- A dependent is no longer ineligible to have dependents;
- Children of divorced parents are treated as dependents of both; and
- If an individual has standing as taxpayer’s spouse or dependent at the time medical care is rendered or paid for, payments on his or her behalf are deductible.
A taxpayer’s share of unreimbursed payments of a dependent’s medical expenses under a multiple support agreement (e.g., brothers and sisters agree to share in the support of a parent in need of medical services at a nursing home) is deductible even if that dependent doesn’t pass the gross income test. Payments of a deceased spouse’s or dependent’s medical expenses are deductible in the year paid. Even if the executor of the deceased spouse’s or dependent’s estate pays decedent’s medical expenses within one year of date of death, the survivor can still deduct these expenses by filing an amended return.
An abbreviated list of products, procedures, and services eligible for the medical expenses deduction follows below:
-
Abortion;
-
Acupuncture;
-
Treatment for alcoholism;
-
Ambulance services;
-
A prescription for birth control pills;
-
Contact lenses, laser eye surgery, eyeglasses, and surgeries for nearsightedness, including LASIK and radial keratotomy;
-
Cosmetic surgery but only for the correction of an acquired or congenital deformity;
-
Teeth-cleaning, tooth-filling, and other corrective, preventive, and restorative services of a dentist, dental hygienist, oral surgeon, or periodontist (cosmetic procedures, including teeth whitening, are usually not deductible);
-
Diagnostic tests for cancer, diabetes, heart disease, etc.;
-
Special diets prescribed by a doctor, but diets that replace food normally consumed are not deductible;
-
Treatment for drug addiction;
-
An exercise program recommended by a physician for a specific condition, but a program to improve general health is not deductible;
-
Guide dogs for the blind;
-
Hearing aids, braces, crutches, artificial limbs, and other medical aids;
-
Use of operating room, anesthetist, X-ray technician, and other hospital services;
-
Insurance premiums for health care coverage, including Medigap and other supplemental insurance for items not covered by Social Security, but premiums paid for nonmedical benefits such as disability insurance and accidental death and dismemberment insurance are not deductible;
-
Blood tests, urine analyses, and other laboratory examinations and tests;
-
Long-term care insurance and services, but the cost of care provided by an unlicensed relative or a corporation (or partnership) with a close relationship to the taxpayer or taxpayer’s spouse and dependents is not deductible;
-
Medical equipment and supplies even if sold over the counter;
-
Medicine and drugs, but over-the-counter remedies other than insulin are not deductible;
-
Nursing care, but services for a healthy baby are not deductible;
-
All nursing home costs if the need for medical care is the primary reason for being in the home;
-
Smoking cessation programs;
-
Prescribed therapeutic swimming program, including costs of maintaining pool at residence;
-
Transplant surgery and related costs;
-
Transportation expenses and lodging costs (limited to $50 per night for each eligible person) necessary for the provision of medical care;
-
Weight loss program but only as a treatment for a specific condition or disease;
-
Wheelchairs and motorized scooters; and
-
Wig for a patient with hair loss caused by disease or treatment for disease.
For the most part, capital expenditures are not deductible, but a special exception applies if the main purpose of a home improvement is to provide medical care or benefits. The excess of the actual cost of the medical home improvement over the increase in the home’s fair market value is deductible as a medical expense; the remainder of the cost outlay is booked as an increase in the home’s basis. Ramps, railings, support bars, bathroom modifications, and other structural changes not increasing the value of the home are fully deductible.
Generally speaking, medical expenses beneficial to general health, costs of cosmetic surgery to improve appearance, and payments for illegal treatments or drugs are not deductible. Any portion of a judgment or settlement earmarked for medical care is a nondeductible reimbursement. In the case of a policy providing both medical and nonmedical benefits, the medical portion is deductible only if it is reasonable in relation to the total premium and separately stated.
Despite the large number of available medical expense deductions, the most significant benefit for the taxpayer comes not in the form of a deduction but rather by way of an exclusion. Section 106(a) of the Internal Revenue Code excludes from the employee’s gross income health insurance premiums paid by the employer: “gross income of an employee does not include employer-provided coverage under an accident or health plan.” According to several sources, this is the largest single exclusion from income in the Code for individual taxpayers. The exclusion from an employee’s gross income of health insurance premiums paid (and deducted) by an employer is arguably the most important exception to the longstanding rule that business expenses (pdf file) deductible by one party in a transaction are taxable income to the other. However, there is a stopgap in the form of a timely application of the tax benefit rule: payments received under health insurance plans are not excludable from income to the extent the taxpayer has benefited from prior deductions. And, as emphasized in the definition above, a taxpayer can only deduct medical expenses not compensated by insurance or otherwise, that is, only unreimbursed expenses are deductible.
Additional relevant articles on the deduction for medical expenses are listed below:
-
IRS expenses (pdf file)
Many happy returns, Roger
Comments
Leave a Reply
You must be logged in to post a comment.