Medical expenses can be a substantial financial burden, but the IRS offers some relief by allowing taxpayers to deduct qualified medical expenses. If your medical costs exceed a certain threshold of your income, you may be able to lower your taxable income by deducting these expenses. Knowing what counts as a qualified medical expense, how to calculate your deduction, and how to document these expenses can make a significant difference when it’s time to file your taxes.

In this guide, we’ll explain how the medical expense deduction works, what types of expenses qualify, and some tips to maximize this deduction.

How the Medical Expense Deduction Works

The medical expense deduction is an itemized deduction, meaning you can only claim it if you itemize rather than take the standard deduction. To qualify for this deduction, your total out-of-pocket medical expenses for the year must exceed 7.5% of your adjusted gross income (AGI).

Here’s how the deduction works in practice:

• Calculate 7.5% of Your AGI: Multiply your AGI by 0.075. For example, if your AGI is $50,000, 7.5% of that amount is $3,750.
• Total Your Medical Expenses: Add up all of your qualifying medical expenses for the year.
• Subtract the Threshold Amount: Subtract 7.5% of your AGI from your total medical expenses. Any amount above that threshold is the deductible portion.

For example, if you have an AGI of $50,000 and total medical expenses of $5,000, you would calculate the deduction as follows:

1. 7.5% of $50,000 = $3,750
2. Total medical expenses: $5,000
3. Deductible portion: $5,000 – $3,750 = $1,250

In this case, you could deduct $1,250 in medical expenses.

What Qualifies as a Medical Expense?

The IRS allows you to deduct various medical and dental expenses for yourself, your spouse, and your dependents. Eligible expenses include, but are not limited to:

1. Medical Insurance Premiums:
• Health insurance premiums, including Medicare, qualify as deductible medical expenses. However, premiums paid by an employer are typically not deductible unless you’re self-employed.
2. Prescription Medications:
• Prescription drugs and insulin are eligible for deduction. Over-the-counter medications are generally not deductible unless prescribed by a physician.
3. Doctor and Hospital Fees:
• Fees paid to doctors, surgeons, and specialists, as well as inpatient hospital care, are deductible. These expenses include fees for medical services, laboratory tests, and X-rays.
4. Dental and Vision Care:
• Dental exams, procedures, and braces, as well as vision care, including eye exams, glasses, and contact lenses, are deductible.
5. Long-Term Care:
• Costs for long-term care and premiums for long-term care insurance are eligible for deduction, subject to certain limitations based on age.
6. Mental Health Care:
• Fees for psychotherapy, counseling, and psychiatric care are deductible, as are costs for prescribed medications related to mental health treatment.
7. Medical Equipment and Supplies:
• The cost of durable medical equipment (DME) such as wheelchairs, crutches, and blood pressure monitors qualifies, as do supplies like bandages and diabetic test kits.
8. Transportation and Travel Expenses for Medical Care:
• Travel costs related to medical care, such as transportation to appointments, can be deductible. This includes mileage (at a rate of 22 cents per mile in 2023), parking fees, tolls, and travel costs like airfare if you’re traveling for a medical procedure.

The key to determining what qualifies is to consult IRS Publication 502, which provides a comprehensive list of deductible medical and dental expenses.

How to Calculate and Claim the Deduction

Once you’ve tallied up your qualifying expenses, you’ll need to complete Schedule A of Form 1040 to claim the deduction. Here’s a step-by-step process:

1. Calculate 7.5% of Your AGI: As explained above, multiply your AGI by 0.075 to find the threshold.
2. Gather Documentation for All Medical Expenses: Collect receipts, bills, and statements for all medical expenses to accurately total the amount.
3. Fill Out Schedule A: On Schedule A, enter your total medical expenses and subtract the 7.5% threshold amount. The result is your deductible portion, which will be included in your itemized deductions.
4. Attach Schedule A to Form 1040: Once completed, submit Schedule A with your Form 1040 when you file your taxes.

Strategies for Maximizing the Medical Expense Deduction

Because the medical expense deduction only applies to expenses that exceed 7.5% of your AGI, there are some strategies to help maximize your deduction if your expenses are close to this threshold.

1. “Bunch” Medical Expenses:
• If you’re close to the 7.5% threshold, consider bunching medical expenses in one year. For example, you might schedule elective procedures or order medical supplies at the end of one year to exceed the threshold, then claim the deduction.
2. Utilize Health Savings Accounts (HSAs):
• Contributing to an HSA can reduce your AGI, which may make it easier to meet the 7.5% threshold. Additionally, funds used for qualified medical expenses can be withdrawn tax-free.
3. Track All Small Medical Expenses:
• Minor expenses like co-pays, prescription costs, and even the cost of medical supplies can add up quickly. Don’t overlook these small costs, as they contribute to your total medical expenses.
4. Consider Tax-Loss Harvesting:
• If you have taxable investment accounts, tax-loss harvesting (selling securities at a loss to offset gains) can help reduce your AGI, potentially helping you qualify for the deduction if you’re close to the threshold.

Common Mistakes to Avoid with the Medical Expense Deduction

The medical expense deduction can be beneficial, but there are some common pitfalls to avoid:

1. Failing to Keep Proper Documentation:
• Medical expenses require detailed documentation, including receipts and proof of payment. Failure to maintain accurate records can lead to disallowed deductions in case of an audit.
2. Including Non-Deductible Expenses:
• Certain expenses, such as cosmetic procedures and general health club dues, aren’t deductible. Be sure to review IRS guidelines and exclude non-qualifying expenses from your total.
3. Overlooking Deductible Travel Costs:
• Many taxpayers forget to deduct travel-related costs for medical care. Be sure to track mileage, parking, and tolls, as these expenses can contribute to your deduction.

Example of the Medical Expense Deduction in Action

To illustrate how the medical expense deduction works, let’s consider a hypothetical example:

Emma has an AGI of $60,000 and incurred $7,000 in out-of-pocket medical expenses this year. Here’s how she calculates her deduction:

1. Determine the 7.5% AGI Threshold: $60,000 x 0.075 = $4,500
2. Subtract the Threshold from Total Medical Expenses: $7,000 – $4,500 = $2,500

Emma can claim a $2,500 deduction for medical expenses on Schedule A, which will help reduce her taxable income and lower her tax liability.

Conclusion: Leveraging Medical Expenses to Lower Your Taxable Income

Medical expenses can be a significant financial burden, but the IRS allows taxpayers to deduct a portion of their costs when they exceed 7.5% of AGI. By understanding what qualifies as a deductible medical expense, keeping thorough records, and using strategies like bunching and HSAs, you can maximize your tax savings.

If you expect high medical costs in a given year or are close to the 7.5% threshold, consult a tax professional for tailored guidance. A careful approach to tracking and deducting medical expenses can help reduce your taxable income, providing some relief as you navigate healthcare costs.