The Challenge of Deducting Medical Expenses

By Mary Beth Franklin

Keep careful records on medical costs you hope to deduct

Rising medical costs seem to be on everyone's mind these days as lawmakers continue to battle over health-reform legislation. Although the tax code provides a deduction for some medical costs, only 7 percent of taxpayers claimed it for 2008.

That's because you can deduct only those out-of-pocket medical and dental expenses that exceed 7.5 percent of your adjusted gross income. So if your AGI is $50,000, for example, and you have $4,000 in unreimbursed health-care costs, you would be able to deduct a skimpy $250 as an itemized deduction on Schedule A.

Medical expenses include payments for doctors and dentists, hospital fees, insurance premiums (including Medicare and long-term-care insurance), prescription medications, medical equipment, and supplies that are not reimbursed by health insurance or a flexible spending account.

You cannot deduct expenses for your general health, such as vitamins, but you can deduct a doctor-prescribed weight-loss program. For details on other deductible expenses, from acupuncture to X-rays, see IRS Publication 502, Medical and Dental Expenses.

If it looks as though your medical expenses are approaching the tax-deductible threshold, make sure you add up all related costs for you, your spouse and your dependents. (And for future planning, try to bunch elective medical procedures into years that you'll qualify for a medical deduction.)

You may even be able to deduct medical expenses that you paid for a family member who doesn't qualify as your dependent, such as an elderly parent or an adult child, as long as you paid more than half of their support.

Don't forget to include miles driven for medical purposes. For 2009, you can deduct 24 cents per mile, plus parking fees and tolls.

SPECIAL CASES

If your income took a hit last year due to temporary unemployment or reduced hours, your lower AGI may be the ticket to deducting some medical expenses, even if you haven't been able to deduct them in the past. The lower your income, the more of your medical expenses you'll be able to deduct (assuming your total itemized deductions are more than you could claim with the standard deduction for your filing status).

And while in most cases, filing jointly offers married couples the biggest tax saving, you may want to file separately if one spouse has significant medical costs. Be aware that some tax credits, such as child, dependent-care and higher-education credits, aren't available if you file separately. But if those special situations don't apply to you and one spouse has lower income and high medical costs, you may be able to deduct significantly more than you could filing a joint return.

If you are subject to the alternative minimum tax, a parallel tax system that does not permit many of the usual exemptions and deductions allowed under normal tax rules, you have to meet an even tougher test: Deductible medical expenses must exceed 10 percent of your adjusted gross income.

If you are self-employed and pay health-insurance premiums, you can deduct 100 percent of the cost. (That means this deduction is not subject to the 7.5 percent AGI limitation that other medical expenses are.)

FLEX YOUR SAVINGS

Considering how difficult it is to deduct medical costs on a tax return, most workers are better off contributing to their employer's flexible spending account to pay for their out-of-pocket health-care bills. Because the money that goes through the flex account is not taxed, the effect is the same as allowing you to deduct medical costs -- without worrying about the 7.5 percent limit.

Personal Finance - The Challenge of Deducting Medical Expenses