As a whole, health care costs have been on a consistent rise. In fact, according to statistics put out by census.gov, anticipated expenditures on health care costs for 2010, including amounts paid by both insurance carriers and out-of pocket, will top 2.6 trillion.
Parallel to these figures, the IRS has seen an increase in taxpayers who are opting to itemize their deductions and report their medical and dental expenses on a 1040 Schedule A.
What kinds of expenses does the IRS allow? Is there any dollar limitation on the amount one can deduct? And whose expenses can you deduct?
Standard vs. Itemized Deductions
To start with, be aware that medical and dental expenses are just one example of the various itemized deductions that are allowed on a Schedule A. Taxpayers need to determine which deduction they are choosing to take; both the standard deduction and the itemized deduction are available.
Choose the deduction that will yield the greater amount to be subtracted from your taxable income. The standard deduction amount varies based on your filing status, but as an example, in 2009 couples who chose to file jointly were allowed to deduct a standard amount of $11,400 from their taxable income.
If your itemized deductions, including a percentage of your medical expenses and any other allowable deduction top the standard deduction amount, then you should choose this option. Other popular itemized deductions to consider include mortgage interest paid, state and local taxes, real estate taxes and gifts made to charity.
Medical Expense Percentages
A taxpayer cannot deduct 100% of the cost they paid in medical expenses for the year. You must apply a percentage based on your gross income.
Line 1 of the 1040 Schedule A asks that you list your total annual medical and dental expenses. Line 2 then asks for your Adjusted Gross Income (AGI), or the total amount of income you will be taxed on before applying deductions, exemptions and credits. You would determine this by completing the first page of your 1040 form.
Once you have determined your AGI, you need to multiply the amount by 7.5%, which is the current percentage allocation for medical and dental expenses. In other words, you can deduct only the part of your medical and dental expenses that exceeds 7.5% of your AGI.
Say your total medical and dental expenses are $5,000, and your AGI is $60,000. 7.5% of $60,000 is $4,500. You will be allowed to deduct only $500 ($5,000 minus $4,500). In this example, unless you have other deductions that will bump the total to an amount over your standard deduction, it would not be to your benefit to itemize.
- Insurance premiums for medical and dental care. These amounts must be reduced by any self-employed health insurance deduction already claimed, and any payments to a health plan made with pre-tax dollars.
- Specialists, including acupuncturists, chiropractors, dentists, eye doctors, medical doctors, occupational therapists, osteopathic doctors, physical therapists, podiatrists, psychiatrists / psychologists & psychoanalysts (that you are seeing for medical care only).
- Medical exams and tests, including X-rays, lab services, blood tests, insulin kits and related treatments.
- All non-reimbursed costs associated with hospital care. Eye surgery is included in this, as is ambulatory service.
- In-home nursing care
- Medicare Part B and premiums paid under Medicare Part D
- Smoking cessation programs and weight-loss programs prescribed by a Doctor. Also medical treatments for drug or alcohol addiction.
- Medical aids (eyeglasses, contacts, hearing aids, crutches, wheelchairs, etc.)
- Diet foods
- Elective cosmetic surgery
- Life insurance premiums
- Medicare tax you pay on your wages
- General nursing care and expenses associated with a healthy newborn once you arrive home.
- Illegal drugs
- Imported drugs not approved by the FDA, including foreign-made versions of U.S. approved drugs.
- Nonprescription meds, such as nicotine gum
- Travel or time-off that your doctor recommended
- Funeral, burial or cremation costs
Whose Expenses can you Deduct?
You are allowed to deduct the above expenses not only for yourself, but essentially for anyone that was in your household at the time the services were provided or paid for.
This includes your spouse and any dependents claimed on your return. Expenses paid for a child whom you do not claim, only because the rules governing your divorce or separation prevent you, also qualify. In some cases, a divorce decree stipulates that the non-custodial parent must pay these expenses, or a portion thereof.
You can also deduct the expenses paid toward any person you could have claimed as a dependent except for the fact they did not pass the gross income test, meaning they earned too much on their own for you to claim them.
For additional information, see the 1040 Schedule A instructions specific to the year you are filing, as well as IRS Publication 502, Medical and Dental Expenses Including the Health Coverage Tax Credit.