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Tax Time: Medical Expense Deduction

The high cost of health care is a burden on U.S. families.  Reports show that about four in ten U.S. adults say they have delayed or gone without medical care in the last year due to cost, with dental services being the most common type of care adults report putting off due to cost. About a quarter of adults say they or family member in their household have not filled a prescription, cut pills in half, or skipped doses of medicine in the last year because of the cost.

Although I cannot provide a solution for these necessary medical expenses, following are a few ways to potentially save money when these costs are incurred.

First, let’s look at after the fact.  After all your medical expenses have been paid, taxpayers can deduct their qualified unreimbursed medical care expenses on their 2022 tax return. These are costs incurred and paid for with money that has already been taxed, aka your income.

IRS defines qualifying medical expenses as those related to the “diagnosis, cure, mitigation, treatment, or prevention of a disease or condition affecting any part or function of the body.”

Unreimbursed medical expenses are the costs of medical expenses not otherwise paid for by insurance or some other third party, including medical and hospital insurance premiums, co-payments, and deductibles; Medicare A and B premiums; prescription medications; dental care; vision care; and nursing care provided at home or in a nursing home or home for the aged.

The IRS also lets you deduct the expenses that you pay to travel for medical care, such as mileage on your car, bus fare and parking fees.

A comprehensive list of what is and is not allowed can be found on IRS website.

But Wait!  Here’s The Catch!  Those expenses must exceed 7.5% of your adjusted gross income (AGI) AND you must itemize your deductions on Schedule A in order to deduct your medical expenses. This option is in lieu of taking the standard deduction.

Be clear on what qualifies.  If you have a prescription medication that costs $50, and your insurance company pays $20. You pay $30. With the medical expense deduction, you can only deduct the $30.

Now let’s look at how this may or not make sense for claiming the medical expense deduction.

For example: Your AGI is $100,000 x 7.5% = $7500.  The amount of money out of your pocket must be in excess of $7500 to claim this deduction.  (Basically, the first $7500 doesn’t count.) And depending on how much excess, it may be more advantageous for you to take the standard deduction.

There is an IRS FREE TOOL to help you determine if you are eligible for the medical expense deduction.  Using this tool will then help you determine if you qualify and what receipts you should keep with your tax records.

Second, this option is how to save money for medical expenses without being taxed.  The following options detail how you can fund certain accounts with pre-taxed dollars which you use to pay your medical expenses.  Following are details on each type of account.

  1. HSA – Health Savings Account -Is a tax-exempt account set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur, including deductibles of a HDHP (high deductible health plan) which is a requirement for participation.  Also, there are annual contribution limits.

Benefit – The contributions into the account are tax deductible even if you do not itemize your deductions on Schedule A.

  • MSA – Medical Savings Accounts – Also referred to as Archer MSAs, these are created to help self-employed and employees of certain small employers meet medical care costs not covered by their HDHP plan and are funded with money that has not been taxed.

Benefit – The contributions into the account are tax deductible even if you do not itemize your deductions on Schedule A.

  • FSA – Flexible Spending Arrangements – This is essentially a bank account reserved to pay for your out-of-pocket health care costs.  It is funded with money that is not taxed through voluntary salary reduction agreements with the employer. The downside to this type of account is the use-it-or-lose-it rule; whatever amount is left unspent at the end of the year or early in the following year may be forfeited. There are annual contribution limits.

Benefit – The contributions made by your employer can be excluded from your gross income.

  • HRA – Health Reimbursement Arrangements – This type is funded solely by the employer, not through your voluntary salary reduction. Employees are reimbursed tax free for qualified medical expenses up to a maximum amount. It may be available along with other health plans including FSAs.  The downside is that should you leave this employer, you forfeit any remaining funds back to the employer.

Benefit – Contributions made by your employer can be excluded from your gross income.

When claiming any tax deduction, like medical expenses, it is always important to keep accurate records.  You do not need to provide them to IRS when you file your tax return.  But it is best to keep a record of such items as receipts and invoices.  The important details to include are the name and address of each person or entity you paid, as well as the amount and date of each payment.

If you would like Saunders Tax & Accounting to determine what is most advantageous in your situation, schedule an appointment by contacting us at 301-714-2071 or visiting www.SaundersTax.com.  We have been helping our clients enjoy a Less Taxing Life and More Prosperous Solutions since 1984. And we can help you, too!

Comments

Donna L DeShong 1933-2024

Donna retired from Letterkenny Army Depot after thirty-three years. She loved her family and spending time with her grandchildren and great-grandchildren.

Craig E Koons 1960-2024

Craig worked with his father at Koons AI in Waynesboro, as a livestock breeder for many years and was part owner of the company for the past 25 years.

Jack G “Digger” Mellott 1926-2024

Jack was a United States Navy Veteran serving at Pearl Harbor, Okinawa, Guam, and Nagasaki during WWII. Jack enjoyed working outside and maintaining his home and property.

David M Lawver 1970-2024

Dave was a member of the Foursquare Church in Gettysburg, PA. He was employed at Shadowfax in York since 1990.

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