Every year probably one of the most asked questions we receive from individual tax clients is on medical expenses. Health Care costs are on the rise in premiums and out of pocket expenses. Medical expenses are hitting everyone’s budget, and we want to make sure you know the facts and are prepared for your taxes this year.
Itemized Deductions-Medical Expenses
Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. Medical expenses include the costs of equipment, supplies, and diagnostic devices needed for these purposes. The expenses must be primarily to alleviate or prevent a physical or mental defect or illness.
Limit on Itemized Deductions
Itemized deductions for medical expenses are limited to the amount above 10% of the taxpayer’s adjusted gross income (7.5% for taxpayers age 65 or over). Amounts below the percentage limit are not deductible. For 2012 and earlier years, the limit was 7.5% of AGI for all taxpayers.
When Medical Expenses Are Deductible
Medical expenses are deductible in the year paid, regardless of when the services in the past were provided. Fees paid by check are considered paid on the date mailed or delivered. Expenses paid by phone or online are considered paid on the date the financial institution statement shows as the payment date.
- Credit Card-Expenses paid by credit card are considered paid on the date charged to the credit card, not the date of the balance on the credit card is paid.
- Future Services-Payments for care to be provided substantially beyond the end of the year are not deductible as medical expenses, except for lifetime care advance payments and payments for long-term care insurance.
Whose Medical Expenses Are Deductible
Deductible expenses include those incurred by the taxpayer, spouse, or dependent.
- Spouse-The taxpayer must have been married to the spouse either at the time the spouse received the medical services or at the time the taxpayer paid the medical expenses.
- Dependent-Medical expenses paid for a dependent are deductible if the person was a dependent either at the time the services were provided or at the time the expenses were paid. For medical expense purposes, a dependent is any person for whom an exemption deduction is allowed, plus anyone who cannot be claimed as a dependent because of one of the following:
- The person who paid the medical expenses was a dependent of another taxpayer
- The person for whom the medical expenses were paid filed a joint return,
- The person for whom medical expenses were paid had gross income of $4,050 or more during the year, or
- The dependency exemption for a child of divorced or separated parents was assigned to the non-paying parent.
- Decedent-Medical expenses paid before death by a decedent are included on the decedent’s final return. This includes expenses for the decedent’s spouse and dependents. A surviving spouse or personal representative of a decedent can choose to treat medical expenses paid by the estate for the medical care of the decedent as paid by the decedent at the time the medical services were provided if the costs are paid within one year of the day after the date of death.
- Medical expenses for a deceased spouse, or deceased dependent is deducted on the taxpayer’s return in the year paid, whether they are paid before or after the decedent’s death. The expenses are deductible if the decedent was the taxpayer’s spouse or dependent either at the time the medical services were provided or at the time the expenses were paid.
Amounts paid for qualified long-term care expenses are deductible as medical expenses. Qualified long-term care services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, rehabilitative services, and maintenance and personal care services that are required by an individual who is chronically ill, and are provided under a plan of care prescribed by a licensed medical practitioner.
The cost of living in a nursing home, including meals and lodging, is deductible if a principal reason for being there is to get medical care. If the taxpayer is in a nursing home for personal reasons, only the part of the cost that is for medical or nursing care is deductible.
The cost of prescribed drugs is deductible. Nonprescription medicines, such as nicotine gum and patches, are not deductible.
- Over-the-counter drugs. The cost of drugs purchased without a prescription, such as antacid, allergy medicine, and pain relievers, is not deductible as a medical expense. The cost of dietary supplements, such as vitamins that are merely beneficial to the general health of the employee is not reimbursable on a pretax basis.
- Insulin exception. The cost of insulin is deductible whether or not a doctor prescribes it.
- Imported drugs. Imported prescription drugs can be deducted only if legally imported. The cost of prescribed drugs purchased and consumed in another country are deductible only if the drug is legal in both the other country and the United States.
Reimbursed Medical Expenses
Medical expenses that are reimbursed by insurance, Medicare, Archer MSAs, health savings accounts (HSAs), or other sources are not deductible. Reduce total medical costs paid by total reimbursements received during the year. Reimbursements for medical expenses are not included in income, and the cost that is reimbursed is not deducted from income. However, any medical expenses that exceed the reimbursements are deductible, and any reimbursements that exceed medical expenses are taxable to the extent the reimbursement was provided to the taxpayer on a pre-tax basis.
If you want to learn more about how we can serve your tax planning and preparation needs for your business and or personal returns, or if you would like general information about our business advisory and coaching services, we encourage you to contact us at 513-206-9673.