The cost of healthcare has been growing much faster than inflation, and will likely continue that trajectory considering the changes implemented by the Patient Protection and Affordable Care Act. This unfortunate trend may leave you wondering if you have any recourse to save money and reduce the impact of costly healthcare at all.
Plus, if you are not currently covered by health insurance, you may be required to purchase it with the implementation of the individual health insurance mandate in 2014. Though some income groups will receive assistance to afford coverage, many won’t and will face a fine for not purchasing adequate coverage.
Fortunately, you may be able to effectively reduce your healthcare costs by taking advantage of the range of available healthcare-related tax deductions.
How to Claim Health-Related Tax Deductions
Through conventional deductions on Schedule A and a special tax break for self-employed workers, you can recover a lot of the money you’ve spent on health issues.
The most common and familiar method for lowering your tax liability due to health expenses is to itemize your deductions and include medical expenses on Schedule A. You can deduct qualified healthcare costs that are greater than 7.5% of your adjusted gross income (AGI). Though for many that income threshold is high, there are a range of expenses you can claim that qualify to meet it. (Of note, the income threshold for deducting healthcare expenses is scheduled to increase to 10% of AGI in 2013.)
For example, if your AGI is $40,000 in 2012, then the 7.5% minimum would be $3,000. If your medical costs for the year are $5,000, then you can include the $2,000 difference in your itemized deduction for that year. If your medical expenses were less than $3,000, you won’t get any tax benefit.
Expenses that your employer or insurance company cover don’t count, and you can’t “double dip” your tax break by claiming deductions for anything you’ve paid for from your health savings account (HSA) or flexible spending account (FSA).
However, when you pay out of your own pocket, you can include all qualifying healthcare expenses you paid for yourself, as well as anything you paid for your spouse or your dependents. The key is to know every possible expense that can help you meet that 7.5% threshold. Start with these five, and talk with your accountant about more possibilities.
Health Expenses You Can Deduct
The full list of expenses that you can include is very long, and you can review every item on the IRS website. The five best ways to meet the 7.5% threshold are:
- Doctor Visits. Payments to any medical professional are deductible, and your primary physician isn’t the only one whose costs can be applied. Charges from nurse practitioners, chiropractors, osteopaths, Christian Science practitioners, psychiatrists, psychologists, and optometrists all fit the bill.
- Copays on Doctor Visits or Prescriptions. The amount you pay out-of-pocket for copays is deductible; however, the portion that your insurance covers is not.
- Dental Treatment. Any dental work for prevention, diagnosis, or correction of oral issues is deductible, from cleanings, to x-rays, to fillings. However, cosmetic procedures, such as teeth whitening, aren’t eligible.
- Medical Equipment. If you need to buy devices such as blood sugar meters, or equipment such as a cane or wheelchair, you can include these expenses on your Schedule A as long as you have a justifiable medical need for the item.
- Glasses, Contact Lenses, and Supplies. Your out-of-pocket costs for your glasses and contact lenses are deductible as long as you are using them to correct a vision problem. You can even deduct the cost of supplies for maintaining your glasses and contacts, including saline solution, enzyme cleaner, and cases. Eye exams are also deductible.
Can I Deduct Health Insurance Premiums?
Often, you can deduct health insurance premiums – but it’s not a simple clear-cut rule. For some plans, you can deduct your premiums, but you may face some limits. You can’t deduct anything that already gives you a tax break, and if you pay for your medical premiums with pre-tax money, then you can’t include the expense in your deductions.
Still, you can find plenty of premiums that you can deduct, including the following:
- Insurance Premiums. If you’re paying for individual health insurance out of your own pocket with no other tax break, you can deduct these expenses. However, if you’re part of a group policy through your workplace and you pay the premium with pre-tax money, you’ve already gotten your tax break – you can’t deduct the same costs twice. Additionally, if you participate in an insurance plan that covers medical issues and other services, only the portion of the premium that goes toward medical services counts toward your deduction. It may sound complicated, but your plan provider can break down the costs for you. If you’re ever unsure, consult your HR department, check your pay stub, or look to the deductible premium payments listed in box 1 of your W-2 Form.
- Medicare Part A Premiums. You can only deduct Medicare Part A premiums if you are not covered by Social Security. Technically, under Social Security, the amount you pay for Medicare Part A is considered a payroll tax – it is not considered a medical expense. For example, some government employees are only covered by a pension plan, and in that case Medicare Part A premiums are deductible.
- Medicare Part B Premiums. If you choose to enroll in Medicare Part B, the premiums you pay are qualified medical expenses that you can deduct. Your Medicare B premium amount shows up on your Social Security statement.
- Medicare Part D Premiums. Medicare Part D premiums are deductible.
- Long-Term Care Insurance Premiums. In order to deduct premiums paid for a long-term care insurance policy, the policy must be considered a qualified long-term care policy. Your insurance agent can let you know whether your plan is classified as qualified. However, you are limited in how much you can deduct, depending on your age. If you and your spouse are both on a policy, you can each deduct the amount that corresponds to your age (these are 2012 limits):
- Age 40 or under: $350
- Age 41 to 50: $660
- Age 51 to 60: $1,310
- Age 61 to 70: $3,500
- Age 71 or over: $4,370
Health Expenses You Can’t Deduct
Even if a medical professional recommends them, you still can’t claim certain things, including:
- Nonprescription Medication. Even if your doctor told you to quit smoking, your nicotine patches aren’t deductible. The same rule applies to aspirin and many other common over-the-counter drugs.
- Life Insurance Policies. Though you may need a life insurance policy, you can’t deduct the premiums. Policies that cover injury, hospitalization, and accidental blindness or loss of limb aren’t deductible either.
- Funeral Expenses. Only expenses for the living are considered medical expenses. Funeral and cremation services are not deductible.
- Childcare for Healthy Children. While some childcare for ill or disabled children can be categorized as a medical expense, regular childcare for children who do not require special assistance isn’t deductible as a medical expense. You may be able to deduct it using the child care tax credit, however.
- Health Club Dues. You may be able to get reimbursed from your health insurance company, but you can’t deduct gym payments as medical expenses. Still, consider how much you’ll save in medical expenses by going regularly.
- Marijuana and Other Illegal Substances. It is legal in many states to purchase marijuana if prescribed by a doctor. But the IRS uses federal law. In other words, you can’t get a tax break on state-sanctioned use because the federal government still classifies it as illegal.
Taking Advantage of Timing and Filing Status
Even if you end up using a payment plan or spreading out your healthcare costs with a credit card, the IRS allows you to deduct healthcare costs in the year in which you make the payment. Thus, if you know you’ll have a lot of expenses back to back, you might benefit by clumping them into one year and getting the tax break, but paying them off over time.
Also, if you are married, and one spouse has a large amount of medical expenses but a low income, you might be able to get a greater benefit by filing as married filing separately. Since 7.5% of the lower income is less than 7.5% of your incomes combined, you could potentially deduct a much larger portion than if you file as married filing jointly. Since you would both have to itemize, however, check with an accountant first to see what the total effect would be.
Keep in mind that the threshold to deduct medical expenses is increasing from 7.5% of income to 10% of income in 2013.
Finally, unusually high medical expenses are a flag for a tax audit, even if they are 100% legitimate. Protect yourself in case of an audit by retaining tax-related receipts for at least seven years.
Tax Break for Self-Employed Workers
If you don’t work for a company that gives you access to a large-group plan, health insurance premiums can be downright unaffordable. However, self-employed workers can deduct health insurance premiums as an above the line dedcution on Form 1040.
To take this deduction, total the healthcare premiums paid during the year for yourself, your spouse, and dependents and use the Self-Employed Health Insurance Deduction Worksheet (included in the Form 1040 Instructions) to figure out the amount you can deduct. Once calculated, enter that amount on line 29 of Form 1040 for tax year 2012.
Healthcare costs can be steep, especially if you’re self-employed, but with a little planning and preparation, you can cut those costs by saving on your taxes. You might have to strain your budget throughout the year, but at least your bottom line can even out when you get your refund.
Are you planning to take advantage of these tax breaks? What kinds of medical costs have you deducted in the past?