Medical Expenses Deduction: Everything You Need to Know
As we all know, medical expenses can be a significant financial burden for many people. Luckily, the IRS allows taxpayers to deduct qualified medical and dental expenses on their tax return. In this post, we will explore everything you need to know about medical expenses deduction.
What are Qualified Medical and Dental Expenses?
Qualified medical and dental expenses are those that are necessary for the diagnosis, cure, mitigation, treatment or prevention of disease or illness. They must also be primarily to alleviate or prevent a physical or mental defect or illness.
These expenses may include:
– Doctor visits
– Prescription medications
– Hospital stays
– Diagnostic tests
– Dental care
– Vision care (glasses/contacts)
– Mental health services
– Physical therapy
– Chiropractic services
It’s important to note that cosmetic procedures like teeth whitening and plastic surgery do not qualify as deductible medical expenses unless they are deemed medically necessary by a doctor.
What is the Medical Expense Deduction?
The medical expense deduction is an itemized deduction that allows taxpayers to reduce their taxable income by the amount of qualifying out-of-pocket healthcare costs incurred during the year. Taxpayers can only claim this deduction if they had enough qualified healthcare expenditures to exceed 7.5% of their adjusted gross income (AGI) in 2020 and 2021; however, beginning in 2022, it will increase back up to 10%.
For example: If your AGI is $50K per year and you have $6K in qualified medical expenses then there would be no tax benefit because it falls below the threshold of $3.75K ($50K * .075= $3.75k). But if you have more than $3750 worth of eligible health-care spending then any excess above that limit can help with reducing federal taxes owed.
How Do You Qualify for The Medical Expense Deduction?
To qualify for the medical expense deduction, you must meet the following criteria:
– You must itemize your deductions on your tax return.
– Your qualified medical expenses must exceed 7.5% of your Adjusted Gross Income (AGI) in 2020 and 2021.
– You can only deduct expenses that were not reimbursed by insurance or any other third party.
It’s important to note that if you are claiming the standard deduction on your tax return, you cannot claim the medical expense deduction.
How to Calculate Your Medical Expense Deduction
Calculating your medical expense deduction can be a bit tricky since it requires careful record keeping and documentation throughout the year. Here are some steps to help you calculate your medical expense deduction:
Step 1: Determine Your AGI
Your AGI is typically found on line 11 of Form 1040. It includes all taxable income such as wages, salaries, tips, interest income and dividends minus certain adjustments like student loan interest.
Step 2: Total Up Your Qualified Medical Expenses
Add up all eligible healthcare spending for yourself (and spouse/dependents if applicable). This may include things like doctor visits, prescription medications, hospital stays etc., but remember that cosmetic procedures do not count unless they’re deemed medically necessary by a physician.
Step 3: Subtract The Threshold
Once you have calculated the total amount of eligible health-care spending from step two above then subtracting this number from either (a) $3k or (b) an adjusted gross income percentage between .075-.10 depending upon which years’ taxes being filed will give an estimated net benefit towards reducing federal taxes owed.
For example:
If a taxpayer has an AGI of $50K in Year A and incurred $10K worth of qualified healthcare expenses during that year; then their deductible amount would be equal to ($10K – (.075 *$50K))= $6.25K, which would help reduce their taxable income for that year.
What Are Some Common Medical Expenses That Can Be Deducted?
Some of the most common medical expenses that can be deducted include:
– Doctor visits
– Prescription medications
– Hospital stays
– Diagnostic tests (e.g X-rays, MRIs)
– Dental care including orthodontia for children under 18 years old.
– Vision care (glasses/contacts)
– Mental health services like counseling or therapy sessions
– Physical therapy
– Chiropractic services
It’s important to note that eligible expenses may vary depending on specific circumstances and tax laws in different states/countries.
How To Keep Track of Your Medical Expenses
Documenting your healthcare spending throughout the year is crucial if you plan on claiming a medical expense deduction at tax time. Here are some tips to help you keep track of your medical expenses:
1. Save all receipts and invoices from doctors, hospitals, pharmacies etc., as proof of payment.
2. Keep track of mileage if driving for medical purposes.
3. Use a spreadsheet or app to record all healthcare spending along with dates and descriptions so it’s easier to organize when filing taxes.
Conclusion
In summary, the medical expense deduction can be a valuable financial benefit for those who have significant out-of-pocket healthcare costs each year. By keeping careful records and tracking qualified expenses throughout the year, taxpayers can potentially claim this itemized deduction come tax time.
Remember: only qualifying healthcare costs exceeding 7.5% /10% AGI thresholds can be deductible so make sure you understand how these thresholds work before calculating any potential savings towards federal taxes owed!