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Prescription for savings
With incomes down, costs up, more people may qualify for medical deduction
By Anya Martin
Last Update: 8:26 PM ET Apr 8, 2009
DECATUR, Ga. (MarketWatch) -- Most people skip the tax deduction for medical expenses because the threshold to qualify for it is so steep, but if you or your spouse lost a job or otherwise saw your income reduced in 2008, it might be worth digging out those health-care bills.
The IRS allows a wide range of expenses to be deducted, and you may be surprised to find that a variety of health-care costs paid for you, your spouse, children, elderly parents and other qualifying family members add up to more than you expect.
To qualify for the deduction, you have to itemize, and only the dollar amount of medical and dental costs exceeding 7.5% of adjusted gross income is deductible. In other words, total all your medical expenses and subtract 7.5% of your adjusted gross income (line 38 on Form 1040). Any amount remaining is deductible on Schedule A.
With many people's income lower this year, and with medical costs continuing to rise, more taxpayers than usual may qualify.
For some people, this tax deduction may be an unwelcome reminder of high medical costs from a catastrophic illness or accident, but many eligible medical expenses border on the routine, said Bradford C. Dickson, a partner in charge of tax practice at Atlanta-based Tarpley & Underwood.
"I suspect that this year a lot more people will benefit from this deduction," Dickson said.
Everyday expenses often deductible
In addition to doctor and hospital bills, deductible medical and dental expenses include hearing aids, eyeglasses, contact lenses, contact lens cleaning solutions, root canals/crowns, special education fees for an autistic child, and that quintessential adolescent rite of passage -- braces.
The costs incurred for in vitro fertilization and surgeries to enhance fertility are eligible, as are the costs of an abortion, acupuncture, as well as treatment received from a Christian Science practitioner.
Newly eligible for deduction this year are charges for annual physical examinations, a full-body electronic scan and pregnancy test kits.
The first step is to check the long list of deductible and nondeductible medical expenses listed in IRS Publication 502. For items and services not mentioned, the key determinant is that the expenditure was not just to benefit general good health, such as taking vitamin tablets, but a medical necessity, which the IRS defines as being "primarily to alleviate or prevent a physical or mental defect or illness."
A general guideline is that the IRS is likely to disallow medical expenses rejected by your insurance company, but even that is not a hard and fast rule, said Sandra Martin, incoming president of the National Association of Enrolled Agents.
"In other words, if you want to go to a health club and exercise, that's not deductible, but if you are diagnosed as obese and your doctor says that you need to go to a health club and you pay for it yourself, that's deductible," she said.
Cosmetic surgery doesn't qualify if it's just to improve your looks, but correcting a health problem does qualify, such as reconstructive surgery after a facial injury.
More deductible expenses
Costs for disability-related needs such as a wheelchair, guide dog, crutches or a TV closed-captioning device qualify, as do capital expenses for doctor-mandated modifications to one's home such as widening doorways or lowering sinks are all or partially deductible.
A notable exception is an elevator or anything else deemed to increase the value of your property, Dickson said.
Travel expenses to and from exams and treatment also are deductible, ranging from taxi, bus and train fares to the use of your own car, including tolls and parking fees. The rate for medical miles driven from Jan. 1 to June 30, 2008 is 19 cents per mile, but along with gasoline prices last summer, it increased to 27 cents per mile from July 1 to Dec. 31, 2008.
Even hospital meals and lodging may be eligible if you or a dependent were receiving care at that facility. You can also deduct transportation and entry fees, but not lodging or meals, for attending a medical conference related to the chronic illness of you, your spouse, your child or another qualifying family member.
Keep in mind that the standards for deducting an eligible relative's medical expenses that you paid are not as stringent as the rules for dependency exemption deductions, Dickson said.
You must have paid over half of that relative's support in 2008, but that person did not have to live with you and could have earned more than the $3,500 gross income cap mandated by the IRS for an exemption.
Ins-and-outs of insurance
Medical, dental and vision insurance costs are deductible, including Cobra payments, the share you pay of your employer-subsidized health plan -- if you paid with after-tax money -- and premiums for Medicare supplemental insurance policies and Medicare B, C and D coverage.
Insurance co-payments and deductibles are eligible. However, anything paid by your insurance company does not qualify, and neither do bills paid with funds from your health savings account or flexible spending account, Martin said.
The key determinant is that you made the payment and that it came from already-taxed, not pre-tax income, she said.
Long-term care insurance premiums also qualify as medical expenses, but are subject to age-limits. Individuals aged 61 to 70 can deduct up to $3,080 paid in LTC premiums in 2008. The limit for individuals over 70 years of age is higher, up to $3,850.
But life insurance premiums and premiums for disability plans that reimburse for loss of wages due to illness or injury are never deductible.
Dates and documents
When counting up medical and dental expenses for your 2008 return, remember that you can only deduct expenditures paid during the 2008 calendar year, no matter when the services were provided.
However, if you used your credit card to pay, the entire amount is considered paid when the charge is made, not when you pay the credit card bill.
Expenses paid by check are considered paid on the date you mailed or delivered the check, while the date for "pay-by-phone" or online account payments is the date reported on the statement of the financial institution used for the payment.
As with all deductions, in case of an audit, be sure to save all bills, receipts, canceled checks and credit card statements, as well as medical records supporting the health reasons for your treatment, said Abe Schneier, senior manager of the American Institute of Certified Professional Accountants.
"I don't think medical expenses are treated any differently than income or the mortgage deduction," he said. "The IRS compares the amount to your previous years' tax returns and your income. The question is 'can you document the expenses that you claim?'"
And one final painful point: If you are unlucky enough to be subject to the alternative minimum tax, then the limit for deductible medical expenses rises to 10% of adjusted gross income.
Anya Martin is a freelance writer based in Decatur, Ga.
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