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The Medical Expense Deduction: What You Need to Know

By Matthew Frankel, CFP® - Apr 2, 2016 at 12:21PM

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If you paid lots of medical bills in 2015, here's what you need to know before claiming a deduction.

Are your healthcare costs getting higher and higher? The good news is that you may be able to get some tax relief if you paid a large amount of medical and dental bills in 2015, but not everyone qualifies for this deduction. Here's what you need to know about deducting medical expenses, and what expenses qualify.

Are medical and dental expense deductible? It depends
There is a tax deduction for medical and dental expenses, but don't start gathering your receipts just yet. These expenses are only deductible if you meet a certain threshold.

For most people, medical and dental expenses are deductible only to the extent that they exceed 10% of your adjusted gross income (AGI). If you or your spouse is over 65, the threshold is 7.5% of AGI -- but be aware that this lower threshold is set to expire at the end of 2016. So, if your AGI is $100,000 this year and you're under 65, you can only claim medical and dental expenses above $10,000.

As you can probably imagine, this means that most taxpayers don't qualify for a deduction. However, in the unfortunate event that you did spend more than 10% of your AGI on medical expenses, this can be a valuable deduction and it's important to know what expenses count.

What expenses count?
There is a long list of potential expenses that could be deducted as medical expenses, and you can find the complete list in IRS Publication 502. Just to name some of the most common, here are some examples, including a few you may not have thought of:

  • Acupuncture.
  • Air conditioners -- if necessary for relief from allergies or other respiratory problems.
  • Artificial teeth.
  • Birth control pills prescribed by a doctor.
  • Contact lenses.
  • Special dietary items (if prescribed by a doctor).
  • Doctor/dentist visit expenses.
  • The cost of a doctor-recommended exercise program.
  • Eye surgery, like Lasik.
  • Hospital care.
  • Insurance premiums.
  • Long-term care expenses, and long-term care insurance costs.
  • Medicines.
  • Nursing home expenses.
  • Oxygen and related equipment.
  • Transportation costs for obtaining medical care.
  • X-ray services.

Again, this is by no means an exhaustive list, and some people have (successfully) gotten creative about what qualifies as a medical expense. For example, a friend who is a tax attorney shared a story with me about a client who installed a $30,000 swimming pool and claimed it as a medical expense because the client's physician said it was medically beneficial. The IRS initially denied this deduction; however, it was appealed and ultimately allowed.

It's also worth noting that this and any other deductions are only allowable beyond the added value to your property, if any. The mention of air conditioners on this list is a good example -- if you add a $5,000 air conditioning system that adds $2,000 to your home's appraised value, you can only use the $3,000 difference as a deduction.

What's not deductible?
There are a few types of medical expenses that are never deductible. For example, any expenses reimbursed by your insurance or employer are automatically excluded.

In addition, you generally can't deduct expenses for cosmetic procedures, or the cost of most non-prescription drugs. Also, any general health or dental care products such as toothpaste and vitamins aren't allowed.

Be prepared to back up every single medical deduction
The final point I'd like to make is that if you do qualify for a deduction for medical expenses, be sure that you can document every dollar you claim.

It's a fact that unusual or higher-than-average deductions tend to attract the attention of the IRS. For example, the average taxpayer with a $100,000 AGI claims a charitable deduction of about $3,000. If you claim that you donated $10,000 to charity last year, it could raise red flags. If you have a lot of medical expenses, it can be more of an attention-getter. Because of the AGI threshold, only 5.7% of all tax returns qualified for the deduction in 2014, so you already stand out if you claim it. And, by nature, this is a high-dollar deduction -- the average medical deduction in 2014 was $9,569.

Now, I'm not saying that you'll be audited just for claiming medical expenses. And I'm definitely not saying that you shouldn't take a deduction to which you're entitled simply for fear of an audit. Rather, make sure you save receipts, cancelled checks, and any other documentation that you (not your insurance company) paid those expenses. As long as you do that, even if you are selected to an audit to verify your medical expenses, it should be no more than an inconvenience.

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