Question

Answer the following Essential Question: What is the difference between Qualified Medical Expenses and deductible medical expenses?

Guiding Hints/Questions:

- are qualified medical expenses equal to the amount a taxpayer can claim on schedule A?

- give an example of how qualified medical expenses will differ from the actual amount the taxpayer can deduct.

- don't forget the limitations placed on medical expenses for 2019

Answer 1

Qualified Medical Expenses are generally the same types of services and products that otherwise could be deducted as medical expenses on your yearly income tax return. Some Qualified Medical Expenses, like doctors' visits, lab tests, and hospital stays, are also Medicare-covered services. Services like dental and vision care are Qualified Medical Expenses but aren't covered by Medicare. Qualified Medical Expenses could count toward your Medicare MSA Plan deductible only if the expenses are for Medicare-covered Part A and Part B services.

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What kind of medical expenses are tax-deductible?

IRS Publication 502 has the full list, but in a nutshell here’s what counts as a medical expense.

• Payments to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists and other medical practitioners
• Hospital and nursing home care
• Acupuncture
• Addiction programs, including for quitting smoking
• Weight-loss programs for doctor-diagnosed diseases, including obesity (but diet food and health club dues usually don’t count)
• Insulin and prescription drugs
• Admission and transportation to medical conferences about diseases that you, your spouse or your dependents have (but meals and lodging don’t count)
• Dentures, reading or prescription eyeglasses, contacts, hearing aids, crutches, wheelchairs and service animals
• Transportation costs to and from medical care
• Insurance premiums for medical care or long-term care insurance if they’re not paid by your employer and you pay out of pocket after taxes

Other rules for the medical expense deduction

• You can only include the medical expenses you paid during the year
• You can’t include expenses you were reimbursed for (so if insurance paid the bill, it’s not deductible)

What’s not deductible?

• Funeral or burial expenses
• Over-the-counter medicines
• Toothpaste, toiletries and cosmetics
• Vacations
• Most cosmetic surgery
• Nicotine gum and patches that don’t require a prescription

How to claim the medical expense deduction

You’ll need to take the following steps.

Itemize on your taxes

First, you’ll need to itemize instead of taking the standard deduction. That can mean spending more time on tax prep, but if your standard deduction is less than your itemized deductions, you should itemize and save money anyway. If your standard deduction is more than your itemized deductions, take the standard deduction and save some time. (Read more about itemizing versus taking the standard deduction.)

Use Schedule A

Schedule A allows you to do the math to calculate your deduction. Your tax software can walk you through the steps.

Is it worth claiming medical expenses on taxes? Consider your filing status

Filing separately if you’re married could get you a bigger medical-expenses deduction, but this move is risky because you might lose other tax breaks. Let’s say your spouse racked up $6,000 in medical bills last year. If you file jointly and your combined AGI is $100,000, then only the portion of your medical bills over 7.5% of that — or the portion over $7,500 — is deductible. So in this scenario, you can’t deduct any of your $6,000 in medical bills.

Now, let’s say you file separately. Your AGI is $75,000 and your spouse’s AGI is $25,000. Because the medical bills are your spouse’s, he or she could deduct anything over 7.5% of that $25,000 AGI, or $1,875. That would mean a $4,125 tax deduction for filing separately.

For example, consider that Tom's AGI for 2017 was $80,000, and he had $10,000 in medical expenses. Using the AGI limit of 10%, he would subtract 10% of $80,000, or $8,000, from your $10,000 in medical expenses to get a result of $2,000—and that would be the figure he could claim as a medical expense deduction.

With the tax reform to the AGI limit for medical deductions, Tom can subtract 7.5% of his AGI, which in this example is $6,000. Tom can now claim $4,000 in medical expenses instead of $2,000. This new percentage means Tom can effectively double his medical expense deduction for the 2017 year, compared to 2016.

Under current tax law, medical expenses can be deducted as an itemized deduction on your federal income tax return only to the extent that they exceed 7.5% of adjusted gross income (AGI). This AGI threshold was in place for 2017 and 2018 under the Tax Cuts and Jobs Act (TCJA). And now it’s been extended for 2019 and 2020 by the recent spending package President Trump signed into law on December 20, 2019. Here’s what you need to know to take advantage of this tax break.