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Tax Season
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4 min read
Now that it's tax time, of course you want to maximize your allowed deductions so you can minimize your tax bill. If you had the misfortune of paying large medical bills for yourself or dependents during the tax year, the Internal Revenue Service (IRS) allows U.S. taxpayers to deduct medical expenses that exceed 10% of your adjusted gross income (7.5% if you or your spouse is 65 years of age or older at some point during the tax year). Adjusted gross income is defined as your taxable income minus IRA contributions, student loan interest, and other deductions. If you need help with the math, CNN.com offers a calculator to help you figure out your adjusted gross income.
Medical expenses deduction example
| If your adjusted gross income is | $50,000 |
| You're eligible to deduct your medical expenses if they total more than | $5,000 |
| If you had total medical expenses of | $6,500 |
| You could deduct |
$1,500 ($6,500-$5,000) |
Remember that a tax deduction reduces the amount of your income that's subject to tax. With a $1,500 tax deduction, you avoid paying tax on $1,500 of your income; your actual savings depend on your tax bracket. You'd save $375 on your tax bill if you're in the 25% tax bracket ($1,500 * .25).
Find out if the medical expense deduction works in your circumstances
Before we get to the details of this tax deduction, you should figure out if using it would make sense for you. The medical expense deduction can be used only if you are itemizing all your deductions, so first you must determine if you're better off using the IRS standard deduction or an itemized list of deductions. If you're unsure, here is a list of the IRS standard deduction amounts. If your deductions exceed the standard deduction amount for your filing status, you should itemize your deductions. In addition, the IRS offers an application that tells you whether you can deduct your medical and dental expenses.
Add up your eligible expenses
Once you've decided to itemize your deductions and you know you can deduct your medical and dental expenses, it's time to total up your medical expenses. The IRS provides a full list of eligible medical and dental expenses online, but here are the common categories:
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Fees paid to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, and other medical practitioners
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Inpatient hospital care and residential nursing home care needed for medical purposes; includes cost of meals and lodging
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Eye exams and laser vision correction
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Medical insurance premiums, dental insurance premiums, and long-term care insurance; excludes premiums paid by taxpayer's employer and pre-tax portion of employee health insurance premiums
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Fees for transportation to eligible medical care
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Artificial limbs, wheelchairs, walkers, crutches, and home or automobile modifications necessary for disabled taxpayer or dependent
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Inpatient treatment for alcohol or drug addiction
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Participation in smoking-cessation program and prescription nicotine withdrawal drugs
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Weight-loss program for specific disease diagnosed by physician, including obesity; excludes diet food items and fitness club dues
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Insulin and prescription drugs
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Acupuncture treatments
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Admission and transportation to medical conference relating to taxpayer's or dependent's chronic disease; excludes meals and lodging at conference
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False teeth, reading/prescription eyeglasses, contact lenses, hearing aids, crutches, wheelchairs
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Guide dogs for blind or deaf individuals
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Phone or television devices for hearing impaired
What does not qualify for the medical expense deduction
Here are some items you are not able to include in your deductible medical expenses:
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Any expenses you were reimbursed for; if you received partial reimbursement, only the portion that was not reimbursed is eligible
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Expenses paid with health savings account or flexible spending account funds
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Cosmetic surgery
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Hair transplants and electrolysis
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Over-the-counter drugs
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Fitness club fees
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Vitamins
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Diet foods
While medical expenses exceeding 10% of your adjusted gross income might seem unlikely at first glance, bills can add up quickly. Medical bills are cited as the top reason for U.S. bankruptcy filings. This year, be sure to grab all the medical deductions you're allowed by considering bills from the individual filing the taxes and all dependents. Unfortunately, there are years where you might reach that 10% threshold pretty easily! If you're considering asking a financial advisor for tax advice, see our info sheet for help preparing for the meeting.
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