Nobody likes paying medical bills, but the good news is that if you had high medical costs last year, you may be able to use them to your advantage at tax time. This week, work to gather information about all the medical costs you paid last year. When you fill out your tax return through OnePriceTaxes, this information will come in handy to determine whether you qualify for tax deductions that could save you hundreds, or even thousands, of dollars.
Deducting Medical Expenses
The Internal Revenue Services allows you to deduct the medical expenses you paid that exceed 10 percent of your Adjusted Gross Income (AGI). If you or your spouse are 65 years of age or older, you can deduct medical expenses that exceed 7.5 percent of your AGI. For example, if your AGI is $60,000 and you are 43 years old, you can deduct medical expenses that exceed $6,000. If you spent $8,200 on medical care, you would be able to deduct $2,200.
One important rule to note is that you must claim the deduction for medical expenses as an itemized deduction on Schedule A. When you fill out your taxes through OnePriceTaxes, you can list potential itemized deductions, including medical expenses, charitable contributions, mortgage interest, property taxes, and state taxes. The software will then determine whether it is more advantageous for you to claim the itemized deductions or the standard deduction.
A wide range of medical expenses qualify as deductible on your tax return. In general, if you are getting preventative care or a procedure or equipment recommended by a doctor, the cost is likely to be deductible.
Qualifying medical expenses include:
- Preventative care
- Doctor visits when sick
- Prescription medications
- Transportation to medical care, parking costs, ambulance costs
- Dental care
- Eye exams, prescription eyeglasses, prescription contacts, contact lens care products
- Fertility enhancement
- Long-term care costs
- Psychiatric care
- Hearing aids
You can also deduct the cost of health insurance premiums if you pay them out of pocket. However, you cannot deduct the premiums if you get an employer-sponsored health insurance plan and the premiums are not listed on your W-2. This is because you paid the premiums tax-free out of your paychecks, so you cannot get another deduction for them.
Keep in mind that you need to pay the medical expenses out of pocket to be able to qualify to take the deduction. If you paid the expenses out of a tax-advantaged account, like a flexible spending account or health savings account, you cannot list them as a deduction. You already deducted your contributions to the account, so you're not allowed to deduct the disbursements as well.
Self-Employed Health Insurance Deduction
If you are self employed and do not have access to insurance through your spouse's employer, the full cost of your health insurance for you, your spouse, and your dependents is deductible. You can claim this deduction even if you do not itemize your deductions. Therefore, your insurance premiums will allow you to qualify for a deduction even if your total medical expenses did not exceed 10 percent of your AGI. Note that if you list your health insurance premiums as a deduction directly on your 1040, you cannot include the premiums in your itemized deductions.
Getting Tax Perks for Future Medical Bills
Although the tax deduction for medical expenses is helpful if you had unexpected medical costs last year, it is not the best way to handle expected medical costs. If you know you will be spending money on medical care in the future, you should establish an account to which you can contribute pre-tax income to be used for medical purposes. Doing it this way allows you to shelter all of your medical costs from income tax, not just the costs that exceed 10 percent of your AGI. In addition, you will be able to put away money in the account for medical costs before the payroll taxes, which adds up to even more savings. Choose from one of several types of accounts that may be available to you.
Health Care Flexible Spending Account (FSA): This account is available from some employers and allows you to allocate a specific amount of your income for the year for medical expenses. You can then request reimbursement from the account for many types of medical spending, including doctor visits, and even medical-related supplies you purchase at a pharmacy or grocery store. It's important to note that the funds you put in an FSA must be used by the end of the calendar year, or your employer gets to keep them.
Health Reimbursement Account (HRA): This is an account your employer contributes to on your behalf. You can request reimbursement from it for any medical expenses you pay. Although the account does not have any specific tax advantages, it has the effect of significantly reducing your out of pocket medical costs. Not all employers offer HRAs, but you can ask yours to see if it is available.
Health Savings Account (HSA): If you have a high-deductible health insurance plan, you may be eligible to open an HSA. This is arguably the best type of tax-sheltered medical account because all the money you put into it is yours to keep, regardless of when you spend it, or even if you leave your job. You can withdraw money from the account at any time to pay health costs, and in the meantime, your contributions can even be invested and grow in value. When you reach retirement age, you can withdraw money from your HSA for any purpose, medical or not.