Introduction to deducting medical expenses for taxes
sponsored by the
Stepnowski Law Offices
Throughout the year, and before April 15 rolls around,
you should keep track of your medical and special
education
expenses as you go along . While this page is geared to those
with children with neurological impairments, it does provide an overall
description of the general tax treatment. Did you know that
treatment
of neurological impairments (that your health insurer did not pay
because
they were "educational") can be tax-deductible medical expenses?
Your situation may differ, and if you have any
questions, consult
a tax professional with print-outs of the links below since he or
she
may not be familiar with everything a family with large medical needs
has to go
through.
Meeting the threshold and how it affects tax savings
Unfortunately,
the Federal government severely restricts the medical deduction to the
amount exceeding 7.5%
of
your income. Thus, deducting works only for those who itemize
deductions.
(Most people with a mortgage should itemize since the interest, real
estate
tax and state income tax deductions carry you above the "Standard
Deduction"
threshold.) The key here is meeting both thresholds--until your
medical
expenses exceed 7.5% of your adjusted gross income, you cannot include
any medical expenses in your deductions.
- Example 1: a family with an income of $50,000 and
therapy bills
of
$12,000
(plus the rest of the family's medical, conference, orthodonia,
eyeglasses
and other expenses of $2,000) for a total medical expense of
$14,000.
Since 7.5% of $50,000 is $3,750, the family can include $11,250
more
deductions. At a tax rate of 15%, the tax savings are $1,687.50.
- Example 2: same family with $100,000 income.
7.5% of
$100,000 is
$7,500. The family can include $6,500 more deductions. At a tax
rate
of 28%, the tax savings are $1,820.
|
Example 1 |
Example 2 |
| Income |
$50,000 |
$100,000 |
At 7.5 %, threshold
|
3,750 |
7,500 |
| Total Medical Expenses |
$14,000 |
$14,000 |
| increased amount to deductions |
+ 11,250 |
+ 6,500 |
| tax rate |
15% |
28% |
| your tax savings |
$1,687.50 |
$1,820.00 |
Because the deductions of medical bills are so
limited by the Internal Revenue Code, you may want to pay these
expenses through a Health Savings Account (HSA). This type of
plan may be offered by your employer when paired with a high deductible
policy. The advantage is that the expenses are paid at
pretax income. The details are in IRS publication
969, but contact your employer's human resource department to see if
this plan is offered.
Do not rely on this article as advice. Other
exclusions
may
apply, such as Alternate Minimum Tax and upper income restrictions.
What can be deducted
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. They include the costs of
equipment, supplies, and diagnostic devices needed for these purposes.
They also include dental expenses.
Medical care expenses must
be primarily to alleviate or prevent a
physical or mental defect or illness. They do not include expenses that
are merely beneficial to general health, such as vitamins or a vacation.
The details are discussed in the next pages.
New:
IRS issues guidance on deducting personal care items as medical expenses
The IRS deems "medical care" expenses as the amounts paid for the diagnosis, cure,
mitigation, treatment, or prevention of disease, or for the purpose of
affecting a structure or function of the body. Medical care expenses are limited
to expenses paid primarily for the prevention or alleviation of a
physical or mental defect or illness.
An
expense which is merely beneficial to general health is a personal
expense and not deductible. A question often arises when an item
can be both. The IRS will look to
these factors to determine whether a
dual-purpose item (i.e., one
that
could be used for personal as well as medical reasons) is primarily for
medical care, including
- the motivation or purpose for making the expenditure,
- whether a physician has recommended the item to treat
or mitigate a diagnosed medical condition,
- linkage between the treatment and the condition,
- proximity in time to the condition’s onset or
recurrence,
- and most importantly, the expense would not have
been paid "but for" the disease or illness.
See the OTC letter.
Conferences may also be
deducted if they qualify.
Dietary items and other personal
items.
Other Tax Credits are available
Because of your child's disability, you may qualify for
other credits, including
- Illinois education credits
- Dependent Care Credits
- Earned Income Credits
For more information about tax credits, see the next
page by click ing link below.
To see the detail of the laws and regulations, click
here:
Relevant
IRS Revenue Rulings and publications.
- "Medical expenses; tuition or
tutoring
fees. If recommended
by the doctor, amounts paid for the child's tutoring by a teacher
specially
trained and qualified to deal with severe learning disabilities may
also
be deducted. "
- Therapy and patterning exercises
- Legal fees.
In the next article,
we discuss tax credits.
IRS
Circular 230 Disclosure:
United States Treasury Regulations provide that a taxpayer may rely
only on formal written advice meeting specific
requirements to avoid federal tax penalties. Any tax advice in the text
of this page,
does not meet those requirements and, accordingly, is not intended or
written to be used, and cannot be used, by any recipient to avoid any
penalties that may be imposed upon such recipient by the Internal
Revenue Service.
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