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Introduction to deducting medical expenses for taxes

sponsored by the Stepnowski Law Offices

Throughout the year, and before April 15 rolls around, you should keep track of your medical and special education expenses as you go along .  While this page is geared to those with children with neurological impairments, it does provide an overall description of the general tax treatment. Did you know that treatment of neurological impairments (that your health insurer did not pay because they were "educational") can be tax-deductible medical expenses? 

Your situation may differ, and if you have any questions, consult a tax professional with print-outs of the links below since he or she may not be familiar with everything a family with large medical needs has to go through.


Meeting the threshold and how it affects tax savings

Unfortunately, the Federal government severely restricts the medical deduction to the amount exceeding 7.5% of your income.  Thus, deducting works only for those who itemize deductions. (Most people with a mortgage should itemize since the interest, real estate tax and state income tax deductions carry you above the "Standard Deduction" threshold.)  The key here is meeting both thresholds--until your medical expenses exceed 7.5% of your adjusted gross income, you cannot include any medical expenses in your deductions.

  • Example 1: a family with an income of $50,000 and therapy bills of $12,000 (plus the rest of the family's  medical, conference, orthodonia, eyeglasses and other expenses of $2,000) for a total medical expense of $14,000.  Since 7.5% of $50,000 is $3,750,  the family can include $11,250 more deductions.  At a tax rate of 15%, the tax savings are $1,687.50.
  • Example 2: same family with $100,000 income.  7.5% of $100,000 is $7,500.  The family can include $6,500 more deductions. At a tax rate of 28%, the tax savings are $1,820.
 



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Example 1 Example 2 Ex.1-(2013)
Ex.2-(2013)
Income $50,000 $100,000 $50,000 $100,000
@ 7.5 %, threshold
3,750 7,500 5,000
10,000
Total Medical Expenses $14,000 $14,000 $14,000
$14,000
increased amount to deductions + 11,250 + 6,500 +$9,000
+$4,000
tax rate 15% 28% 15%
28%
your tax savings $1,687.50 $1,820.00 $1,350.00
$1,120.00

Note for 2017 and 2018: The new tax law has restored the threshold back to 7.5%. These means more medical expenses can be deducted compared to 2013 through 2016.  In 2019, the threshold may increase to 10% again.  This increase may have some families pay all 2018 expenses before December 31, 2018, and even prepay some 2019 expenses to "bunch" the total expenses eligible for the deduction.

Note for 2013: the Obama tax law increased taxes on families with members with medical needs.  (You read that correctly.)   For expenses incurred after January 1, 2013, families will not be able to deduct as much on their taxes.  The new columns on the right (2013) show that the amount of tax savings will be reduced compared to the the columns on the left (2012), by several hundred dollars.


Because the  Internal Revenue Code severely limits the deductions  of medical bills, especially in 2013, you may want to pay these expenses through a Health Savings Account (HSA).  This type of plan may be offered by your employer when paired with a high deductible policy.  The advantage is that the expenses are paid at pretax  income.   The details are in IRS publication 969, but contact your employer's human resource department to see if this plan is offered.

Do not rely on this article as advice. Other exclusions may apply, such as Alternate Minimum Tax and upper income restrictions.


What can be deducted

Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes. They also include dental expenses.

Medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness. They do not include expenses that are merely beneficial to general health, such as vitamins or a vacation.

The details are discussed in the next pages.


New:  IRS issues guidance on deducting personal care items as medical expenses

The IRS deems "medical care" expenses as the amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting a structure or function of the body. Medical care expenses are limited to expenses paid primarily for the prevention or alleviation of a physical or mental defect or illness.

An expense which is merely beneficial to general health is a personal expense and not deductible.  A question often arises when an item can be both.  The IRS will look to these factors to determine whether a dual-purpose item (i.e., one that could be used for personal as well as medical reasons) is primarily for medical care, including:
  • the motivation or purpose for making the expenditure,
  • whether a physician has recommended the item to treat or mitigate a diagnosed medical condition,
  • linkage between the treatment and the condition,
  • proximity in time to the conditionís onset or recurrence,
  • and most importantly, the expense would not have been paid "but for" the disease or illness.
See the OTC letter.

Conferences may also be deducted if they qualify. 

This clarification should help families with children with disabilities.

Dietary items and other personal items.

Other Tax Credits are available

Because of your child's disability, you may qualify for other credits, including

  • Illinois education credits
  • Dependent Care Credits
  • Earned Income Credits

For more information about tax credits, see the next page by click ing link below.


To see the detail of the laws and regulations, click here:

Relevant IRS Revenue Rulings and publications.
  • "Medical expenses; tuition or tutoring fees.  If recommended by the doctor, amounts paid for the child's tutoring by a teacher specially trained and qualified to deal with severe learning disabilities may also be deducted. "
  • Therapy and patterning exercises
  • Legal fees.


In the next article, we discuss tax credits.



IRS Circular 230 Disclosure: United States Treasury Regulations provide that a taxpayer may rely only on formal written advice meeting specific requirements to avoid federal tax penalties. Any tax advice in the text of this page, does not meet those requirements and, accordingly, is not intended or written to be used, and cannot be used, by any recipient to avoid any penalties that may be imposed upon such recipient by the Internal Revenue Service.



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