Understanding Medical Expense Deductions

Did you pay medical expenses this year? Are you wondering if you can claim a tax deduction? The IRS does allow taxpayers to deduct medical expenses if they itemize deductions and meet threshold limitations. In this article, we’ll cover the deductibility of medical expenses, including qualifying medical expenses, HSAs, and healthcare deductions for self-employed individuals.

The Deductibility of Medical Expenses at the Federal Level

Medical expenses are deductible if two conditions are met. First, you must itemize your deductions. The IRS offers taxpayers the ability to take a standard deduction or itemize using mortgage interest, state and local taxes up to $10,000, contributions, and medical expenses. If the aggregate of your itemized deductions exceeds the standard deduction, you can use medical expenses to lower your taxable income.

The second condition is that your total medical expenses must exceed 7.5% of your adjusted gross income (AGI). For example, if your AGI was $100,000, you must have incurred over $7,500 in medical costs to begin deducting expenses paid. If you meet both of these requirements, your medical expense deduction will be found on Schedule A.

Qualifying Medical Expenses on Schedule A

There are a variety of medical expenses that qualify for a deduction if the AGI threshold is met, including:

  • Amounts paid to doctors, dentists, chiropractors, medical practitioners, surgeons, and other professionals in the medical field.
  • Amounts paid to hospitals, nursing homes, and any other medical-related facility.
  • Amounts paid for acupuncture treatment, and drug and alcohol treatment.
  • Amounts paid to participate in a weight-loss program for a specific disease, like obesity.
  • Amounts paid for prescription drugs, eye aids, and hearing aids.
  • Amounts paid for transportation to receive medical care.
  • Amounts paid for insurance premiums, including long-term care.

It’s important to understand that cosmetic procedures, like Botox, aren’t deductible. The procedure needs to be for a medical purpose. In addition, amounts covered by insurance are not deductible.

HSA Withdrawals

A health savings account is an account that allows you to make pre-tax contributions to be used toward medical expenses. Both contributions and distributions are tax-free if the funds are used for medical expenses. However, the IRS does not allow taxpayers to double-dip. This means that medical expenses paid out of an HSA cannot be claimed on other areas of your tax return, like Schedule A.

Self-Employed Medical Expense Deductions

Self-employed taxpayers are able to deduct the cost of medical insurance premiums paid out of pocket without having to itemize deductions or meet the AGI threshold. In addition, shareholders that have more than 2% ownership in an S Corporation can also deduct medical premiums if the amount was added to gross wages. For example, if the company paid $10,000 in medical premiums, this amount will be added to your gross wages on your W-2. Then, you will be able to claim a deduction on your individual income tax return.

Maximizing Your Deduction

If you paid any medical expenses out-of-pocket, it’s important to consult with a qualified accountant to ensure you are maximizing your deductions. Contact Kislay Shah CPA PC today to schedule your free consultation at kislay@shahcpaus.com or 646-328-1326.