Jane Dotson
Health insurance is a crucial financial tool that provides coverage for medical expenses, but it is not always comprehensive, and individuals may incur out-of-pocket costs. In such cases, it is essential to understand whether these expenses are eligible for tax deductions. The IRS allows taxpayers to deduct certain unreimbursed medical expenses, including those for preventative care, treatment, surgeries, dental and vision care, and prescription medications. However, it is important to note that only expenses exceeding 7.5% of the individual's adjusted gross income (AGI) can be considered for deduction. This threshold, set by the Tax Cuts and Jobs Act of 2017, has been made permanent and applies to deductions on Schedule A of Form 1040. Self-employed individuals may also be eligible for a self-employed health insurance deduction, which is an adjustment to income rather than an itemized deduction. It is important to carefully review the IRS guidelines and consult professional advice to determine which medical expenses, if any, can be deducted for tax purposes.
| Characteristics | Values |
|---|---|
| Medical expenses that can be deducted | Preventative care, treatment, surgeries, dental and vision care, visits to psychologists and psychiatrists, prescription medications, appliances such as glasses, contacts, false teeth and hearing aids, acupuncture, addiction treatment, braille publications, chiropractic services, contact lenses, diet food, exercise programs, and health, dental and vision insurance premiums |
| Medical expenses that cannot be deducted | Expenses reimbursed by insurance or employer, cosmetic procedures, non-prescription drugs (except insulin), non-prescription nicotine products, general toiletries, trips and programs to improve general health, funeral and burial expenses, vitamins, health club dues, toothpaste, vitamins, diet food, and non-prescription nicotine products |
| Medical expenses that can be deducted for self-employed individuals | Health insurance costs, premiums paid on a health insurance policy covering medical care, including a qualified long-term care insurance policy for yourself, your spouse, and dependents |
| Medical expenses that can be deducted for retired public safety officers | Health or long-term care insurance premiums that are paid with tax-free distributions from a retirement plan |
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What You'll Learn
Self-employed health insurance deduction
If you are self-employed, you may be eligible to deduct premiums that you pay for medical, dental, and qualifying long-term care insurance coverage for yourself, your spouse, and your dependents. This is known as the self-employed health insurance deduction. This health insurance write-off is entered on Part II of Schedule 1 as an adjustment to income and is then transferred to page 1 of Form 1040. This means that you benefit whether or not you itemize your deductions.
To be eligible for the self-employed health insurance deduction, you must meet certain Internal Revenue Service (IRS) criteria. Firstly, you must have a qualifying insurance plan. Eligible health insurance includes medical insurance, qualifying long-term care coverage, and all Medicare premiums (Parts A, B, C, and D). Secondly, you must have a net profit for the year reported on Schedule C or F. This means that if your self-employment activity is a sole proprietorship that generated a tax loss for the year, you are not allowed to claim the deduction as the business did not generate any positive earned income. However, if you are a business partner or LLC member who is treated as a partner for tax purposes, you can deduct the health insurance premiums you pay directly.
There are also certain restrictions to the self-employed health insurance deduction. If you have access to an employer-sponsored subsidized health insurance plan, you are not eligible for this tax deduction. This applies if either you or your spouse is offered this plan by their employer. This rule is applied on a month-by-month basis, so you would only be disqualified from claiming the deduction for the part of the year that you had employer plan coverage.
It is important to note that you can only claim the health insurance premiums write-off for months when neither you nor your spouse were eligible to participate in an employer-subsidized health plan. Additionally, if you pay for your medical expenses using a flexible spending account or health savings account, those expenses are not deductible because the money in those accounts is already tax-advantaged.
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Medical expenses exceeding 7.5% of AGI
The IRS allows taxpayers to deduct their qualified unreimbursed medical care expenses that exceed 7.5% of their adjusted gross income (AGI). This includes unreimbursed expenses for preventative care, treatment, surgeries, dental and vision care, and visits to psychologists and psychiatrists. It also includes unreimbursed payments for prescription medications and appliances such as glasses, contacts, false teeth, and hearing aids.
To claim the medical expense deduction, taxpayers must itemize their deductions on IRS Schedule A instead of taking the Standard Deduction. This means that taxpayers can deduct the medical and dental expenses they paid for themselves, their spouse, and their dependents during the taxable year, to the extent that these expenses exceed 7.5% of their AGI. It is important to note that the deduction only applies to expenses not compensated by insurance or otherwise, regardless of whether reimbursement is received directly or payment is made on behalf of the individual to the medical provider.
For self-employed individuals, health insurance costs may be eligible for the self-employed health insurance deduction, which is an adjustment to income rather than an itemized deduction. This includes premiums paid on a health insurance policy covering medical care for the individual, their spouse, and dependents, as well as their child under the age of 27, even if the child is not their dependent.
Additionally, if a settlement includes funds for future medical expenses, those funds are not taxable, but taxpayers can only deduct future medical expenses that exceed the award amount.
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Medical expenses reimbursed by HRA
A Health Reimbursement Arrangement (HRA) is a type of health insurance plan that allows you to reimburse your employees tax-free for qualified medical expenses. If you have medical expenses that are reimbursed by an HRA, you cannot include those expenses in your medical expenses. This is because the IRS only allows you to deduct unreimbursed expenses.
Qualified medical expenses (QMEs) are designated by the IRS and include medical, dental, vision, and prescription expenses. Transportation to Alcoholics Anonymous (AA) meetings is an eligible expense with an HRA. Acupressure may also be eligible with an HRA, but in some cases, a Letter of Medical Necessity (LMN) from a medical professional may be required. A fee associated with blood donation for subsequent use by the account holder, spouse, or eligible dependent is also a qualified medical expense with an HRA.
On the other hand, adult day care reimbursement is not eligible with an HRA. Blepharoplasty reimbursement is also not eligible with an HRA, as it is a cosmetic procedure and not a qualified medical expense. The expenses associated with the adoption of a child are not eligible for reimbursement with an HRA.
It's important to note that QMEs are subject to change by the IRS at any time, and it is the member's responsibility to verify that expenses incurred are designated as QMEs.
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Deductible medical expenses
The IRS allows taxpayers to deduct their qualified unreimbursed medical care expenses that exceed 7.5% of their adjusted gross income. These deductible medical expenses include but are not limited to:
- Fees to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, and nontraditional medical practitioners.
- Inpatient hospital care or residential nursing home care, if the availability of medical care is the principal reason for residence in the nursing home, including the cost of meals and lodging charged by the hospital or nursing home.
- Acupuncture treatments.
- Inpatient treatment at a center for alcohol or drug addiction; amounts paid for participation in a smoking-cessation program and for prescription drugs to alleviate nicotine withdrawal.
- Admission and transportation to a medical conference relating to a chronic illness of you, your spouse, or your dependent (if the costs are primarily for and essential to necessary medical care).
- False teeth, reading or prescription eyeglasses, contact lenses, hearing aids, a guide dog or other service animal to assist a visually impaired or hearing disabled person, or a person with other physical disabilities, crutches, and wheelchairs.
- Transportation primarily for and essential to medical care that qualifies for the medical expense deduction. Transportation includes out-of-pocket expenses for a personal car such as gas and oil, or the standard mileage rate for medical expenses, plus the cost of tolls and parking; taxi, bus, or train fare; and ambulance costs.
- Premiums you pay for insurance that covers the expenses of medical care, and the amounts you pay for transportation to get medical care.
- Amounts paid for qualified long-term care services and limited amounts paid for any qualified long-term care insurance contract.
- Premiums for health insurance if you are self-employed.
Expenses that are not deductible medical expenses include:
- The portion of your insurance premiums treated as paid by your employer.
- Funeral or burial expenses.
- Amounts paid for nonprescription medicines.
- Amounts paid for toothpaste, toiletries, or cosmetics.
- Amounts paid for a trip or program for the general improvement of your health.
- Amounts paid for most cosmetic surgery.
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Non-deductible medical expenses
If you are a US taxpayer, you may be able to deduct a portion of your medical costs if they exceed 7.5% of your adjusted gross income (AGI). This is only applicable to unreimbursed expenses for preventative care, treatment, surgeries, dental and vision care, visits to psychologists and psychiatrists, prescription medications, appliances such as glasses, contacts, false teeth and hearing aids, and expenses that you pay to travel for qualified medical care.
- Any medical expenses reimbursed by your insurance or employer.
- Cosmetic procedures.
- Nonprescription drugs (except insulin).
- Purchases for general health, such as toothpaste, health club dues, vitamins, diet food, and nonprescription nicotine products.
- Medical expenses paid in a different year.
- Medical expenses paid using money from a flexible spending account or health savings account.
- Premiums you pay for certain types of policies that aren't tied to the actual cost of the medical care you received.
- Premiums paid under a premium conversion plan, cafeteria plan, or any other medical and dental expenses paid by the plan.
- Funeral or burial expenses.
- Amounts paid for a trip or program for the general improvement of your health.
If you are a retired public safety officer, you cannot include as medical expenses any health or long-term care insurance premiums that you elected to have paid with tax-free distributions from a retirement plan.
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Frequently asked questions
You can only deduct unreimbursed medical expenses that exceed 7.5% of your adjusted gross income (AGI).
Unreimbursed expenses for preventative care, treatment, surgeries, and dental and vision care are deductible. Unreimbursed payments for prescription medications and appliances such as glasses, contacts, false teeth, and hearing aids are also deductible.
You cannot deduct the cost of nonprescription drugs (except insulin) or other purchases for general health, such as toothpaste, health club dues, vitamins, diet food, and nonprescription nicotine products. You also cannot deduct medical expenses paid in a different year.
