Medical expense deductions have a nasty habit of occurring when you're least able to deal with them. When you're faced with a medical problem, adding recordkeeping to your list of issues can sometimes be too much to take. But medical deductions can be important, especially when the corresponding expenses are large.
In fact, in most cases they have to be large. You've got to itemize your deductions in order to claim deductions for medical expenses; unless those expenses are extremely high, they won't have any impact on your tax bill if you simply take the standard deduction. Even if you do itemize deductions, you won't be eligible to deduct medical expenses unless they exceed 7.5% of your adjusted gross income (AGI).
For example, suppose that your AGI amounts to $50,000; 7.5% of that is $3,750. Only medical expenses that exceed that $3,750 -- the 7.5% "floor" -- will be deductible. And of course, you can't deduct any medical expenses that are paid for or reimbursed to you by any type of medical insurance.
Because of the medical deduction "floor," many taxpayers of all income levels have simply chosen to ignore medical expense deductions. That's a poor choice for a number of reasons. To begin with, it's possible that your state tax laws are different from the federal laws. Here in Arizona, you can deduct 100% of your qualified medical expenses on your state return -- no worrying about the 7.5% "floor." But many folks overlook that, failing to claim a deduction on either the federal or state return. Another reason to check your medical expenses when you prepare your return is the possibility that they just might exceed the AGI "floor," especially if you're a low- or moderate-income taxpayer.
However, the most important reason not to overlook those medical expenses is that they encompass many more deductions that you might realize. Most people only think about their doctor appointment co-payments when they think of medical expenses. But that's only the beginning of the list of eligible deducible medical expenses. You need to think outside of the box ... and know the rules.
For one thing, did you know that a variety of modifications made to your home are deductible, as long as they don't increase the value of your home and are made primarily to support medical care for you, your spouse, or a dependent? You can deduct the entire cost of:
- Adding entrance or exit ramps
- Widening doorways or hallways
- Installing railings, support bars, or other modifications to bathrooms
- Lowering or modifying kitchen cabinets or equipment
- Moving or modifying electrical outlets or fixtures
- Installing lifts other than elevators
- Modifying stairways
- Installing handrails or grab bars
- Modifying hardware
- Grading ground or making other modifications outside doorways.
Additionally, modifications to your car to accommodate a disability would also be deductible, though the ordinary operating costs would not be.
What about medically motivated changes to your home that do increase its value? They're not fully deductible, but you can deduct any portion of the cost of the modification that exceeds the increase in your home's value. Such modifications include elevators, spas, and air conditioning systems, among others. Even better, you can deduct any upkeep or electricity costs involved in their operation.
As previously mentioned, the home modifications must be medically necessary in order to qualify as a medical expense deduction. You don't generally need to show proof unless the IRS requests it, but it's still a good idea to include proof with your return. A statement from your physician, for example, can help you head off questions even before they occur.
Travel, meals, and lodging for medical treatment can also be deductible. This includes trips to visit doctors, dentists, hospitals, and pharmacies. The expense must be primarily for and essential to medical care.
You may deduct the actual expense, or use the standard mileage deduction (15 cents per mile from Jan. 1 to Aug. 31, 2005; 22 cents per mile from Sept. 1 to Dec. 31, 2005). You can also deduct parking and toll charges. Medical expenses also include the cost of travel away from home for medical treatment, including meals and lodging en route. However, the cost of meals and lodging incurred while receiving medical treatment is usually not deductible.
The U.S. Supreme Court allowed the deduction of the cost of travel by a heart patient who had been told by his doctor to spend the winter in Florida for general health reasons, but it treated the expense of the taxpayer's apartment and meals while in Florida as non-deductible personal expenses. That said, taxpayers who travel away from home to receive medical treatment from a physician in a licensed hospital or an equivalent facility may deduct their lodging expenses to certain limits, so long as there is no significant element of personal pleasure, recreation, or vacation in the travel away from home. The IRS has also ruled that the cost of travel to attend a seminar relating to a dependent's chronic disease, and the seminar expenses, were both deductible.
Here are some other overlooked medical deductions:
- Alcoholism and drug-addiction treatments (including meals and lodging)
- Birth-control pills prescribed by your doctor
- Cost of lead-based paint removal
- Dental treatments and dentures, bridges, and implants
- Medically prescribed drugs and insulin, but not over-the-counter drugs
- Portion of life-care fee paid to retirement home designated for medical care
- Eye exams, glasses, contact lenses, and supplies to clean and maintain them
- Hearing aids, telephone equipment, and television modification for the hearing-impaired
- Medicare Part B premiums deducted from Social Security checks, and Part A premiums for those not eligible for Social Security but voluntarily enrolled in Medicare
- Hospital services, including room and board for inpatients
- Medical services of physicians, surgeons, specialists, or other medical practitioners such as osteopaths and podiatrists
- Costs of special schools or homes for mentally or physically disabled persons
- Stop-smoking programs and prescription drugs, but not over-the-counter skin patches or nicotine gum
- Surgery, even elective, so long as it is legal and not purely for cosmetic reasons
- Therapy treatments, such as physical, occupational, or speech therapy
- Any medically prescribed weight-loss programs
- Wheelchairs, crutches, walkers, canes, etc.
Before you dismiss your medical expense deduction out of hand, make sure that you're claiming all of the deductions to which you're legally entitled. It might just be the right prescription to ease the pain of your annual tax bill.
When he's not dealing with tax issues, Roy Lewis is a motivational speaker who lives in a trailer down by the river. He understands that The Motley Fool is all about investors writing for investors. You can take a look at the stocks he owns as long as you promise not to ask him which stock to buy. He'll be glad to help you compute your gain or loss when you finally sell a stock, though.