The cost of health care has been rising faster than inflation for the past several decades, and it doesn’t show any signs of slowing down. This unfortunate trend may leave you wondering if you have any recourse to save money and reduce the impact of costly health care at all.
While some income groups receive assistance to afford health insurance coverage, many don’t. Fortunately, you may be able to effectively reduce your health care costs by taking advantage of the range of available health care-related tax deductions.
How to Claim Health-Related Tax Deductions
Through itemized deductions on Schedule A and a special tax break for self-employed workers, you can recover some of the money you’ve spent on health care.
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.
To benefit from itemizing medical expenses, your total itemized deductions – including medical expenses, mortgage interest, state and local taxes, and charitable donations – need to be more than the standard deduction available for your filing status.
For the 2020 tax year, the standard deductions are as follows:
- $12,400 for single taxpayers and married taxpayers filing separately
- $18,650 for heads of household
- $24,800 for married taxpayers filing jointly and qualifying widow(er)s
You can deduct qualified health care costs that are greater than 7.5% of your adjusted gross income (AGI), which you’ll find on line 11 of Form 1040. For some people, that threshold may seem high. But there is a range of expenses you can claim that qualify to meet it.
For example, if your AGI was $40,000 in 2020, 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 wouldn’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 using your health savings account (HSA) or flexible spending account (FSA).
However, when you pay out of your own pocket, you can include all qualifying health care expenses you paid for yourself, as well as anything you paid for your spouse or dependents. The key is to know every possible expense that can help you meet that 7.5% threshold.
Pro tip: If you file your taxes using tax preparation software like H&R Block, they will walk you through every health care deduction you’re allowed to take. If you have any questions, you’ll have the chance to ask one of their live CPAs.
Health Expenses You Can Deduct on Your Tax Return
The full list of expenses that you can include is long, and you can review every item on the IRS website. Start with these five, and talk with your accountant about more possibilities.
- 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 Prescription Medication. You can deduct the amount you pay out of pocket for copays. You cannot deduct the portion that your insurance covers.
- Dental Treatment. Any dental expenses for the prevention, diagnosis, or correction of oral issues is deductible, from cleanings to X-rays to fillings. Cosmetic procedures, such as teeth whitening, aren’t eligible.
- Medical Equipment. If you need to buy medical devices such as blood sugar meters, or equipment such as a cane or wheelchair, you can include these out-of-pocket expenses on your Schedule A as long as you have a justifiable medical need for them.
- Eyeglasses, Contact Lenses, and Supplies. Your out-of-pocket costs for your glasses and contact lenses are deductible as long as you use them to correct a vision problem. That includes out-of-pocket costs for stylish blue light-blocking prescription glasses like Day Swannies Custom Rx Progressives. 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 you can deduct, including the following:
- Insurance Premiums. If you’re paying for an individual health insurance plan 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. If you participate in an insurance plan that covers medical and other services, only the portion of the premium that goes toward medical services counts toward your deduction. It may sound complicated, but your medical insurance 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 tax-deductible premium payments listed in box 1 of your W-2 Form.
- Medicare Part A Premiums. You can deduct Medicare Part A premiums only if you’re not covered by Social Security. Technically, under Social Security, the amount you pay for Medicare Part A is considered a payroll tax, not a medical expense. For example, some government employees are covered by only a pension plan. In these cases, 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 you can deduct. You can find your Medicare B premium amount 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’re 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. The 2020 limits are:
- Age 40 or Under: $430
- Age 41 to 50: $810
- Age 51 to 60: $1,630
- Age 61 to 70: $4,350
- Age 71 or Over: $5,430
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.
- Child Care for Healthy Children. While some child care for ill or disabled children counts as a medical expense, regular child care for children who don’t 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. Your health insurance company may reimburse you for gym payments, but you can’t deduct these payments as medical expenses. Still, consider how much you’ll save in medical expenses by going regularly.
- Marijuana and Other Substances Illegal at the Federal Level. It’s legal in many states to purchase marijuana if a doctor prescribes it. But the IRS uses federal law. In other words, you can’t get an income tax break on state-sanctioned use while the federal government still classifies it as illegal.
Taking Advantage of Timing and Filing Status
The IRS allows you to deduct health care costs in the year in which you make the payment, even if you end up using a payment plan or spreading out the costs with a credit card. So, if you know you’ll have a lot of expenses back to back, you might benefit by clumping them into one year for the federal tax break but paying them off over time.
Also, if you’re married and one spouse has a large number 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. However, since you would both have to itemize, check with an accountant first to see what the total effect would be.
Finally, unusually high medical expenses are a red flag for a tax audit, even if they’re 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, small-business owners and self-employed workers can deduct health insurance premiums as an above-the-line deduction on Form 1040.
To take this deduction, total the health care premiums you paid during the tax 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. Enter that amount on line 16 of Schedule 1.
Health care 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.