To deduct medical and dental expenses on your tax return, you must itemize deductions on Schedule A, and your expenses must exceed 7.5% of your adjusted gross income (AGI). Unfortunately, this means that only taxpayers with extremely large, unreimbursed medical expenses can take advantage of this deduction.
To fully understand how difficult it is for the average taxpayer to gain any advantage from this deduction, let’s consider a family with an adjusted gross income of $75,000. This family had adequate medical insurance through an employer-sponsored health plan, but had large orthodontic dental costs not reimbursed by insurance along with a few medical co-pay expenses. All together, their medical deductions totaled $6,000.
Under the medical and dental expense deduction rule, the first $5,625 of their expenses (7.5% of $75,000) is not deductible. This means that only the remaining $375 is a deductible expense. And this $375 expense will become an actual deduction only if the amount of the family’s total itemized deductions is larger than its standard deduction.
Considering that the standard deduction for the married filing jointly filing status is $10,700 for 2007, it’s easy to see that $375 isn’t much help in arriving at itemized deductions that total more than the standard deduction.
The list of qualifying medical expenses is extensive and includes the cost of diagnosis, cure, mitigation, treatment or prevention of disease, and the cost for treatment affecting any part or function of the body. Expenses also include the cost of equipment, supplies, and diagnostic devices needed for these purposes.
To be deductible, medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness. You can’t deduct expenses that are merely beneficial to general health, such as vitamins or a vacation.
You can deduct the following medical expenses:
The cost of medical care from the following types of practitioners—acupuncturists, chiropractors, dentists, eye doctors, medical doctors, occupational therapists, osteopathic doctors, physical therapists, podiatrists, psychiatrists, psychoanalysts giving medical care, and psychologists
Transportation costs to and from medical care. If you drive your own car, the deduction is equal to 20 cents per mile in 2007.
Amounts paid for qualified long-term care services, and limited amounts paid for any qualified long-term care insurance contracts
Medical insurance premiums. However, pre-tax salary contributions that you make as an employee to an employer-sponsored health insurance plan don’t qualify for the deduction.
Amounts that you pay for Medicare B supplemental insurance, Medicare D insurance, and Medicare A premiums if you’re not covered by Social Security
The following expenses aren’t considered medical expenses subject to the 7.5% limitation:
Generally, you can’t deduct the premiums that you pay for the following type of policies because the benefits afforded aren’t tied to the actual cost of the medical care that you received:
Any policy that pays you a certain amount; for example, a policy that pays you $200 a day while hospitalized
A policy that pays you for lost earnings
A policy that pays a flat amount for the loss of a limb or eyesight
Contributions that you make to a health savings account (HSA) are considered an adjustment to income, which means that you can deduct 100% of your qualifying contributions to an HSA even if you don’t itemize deductions. To learn more, see the Form 8889 instructions.
If you’re a resident of California, New Jersey, New York, Rhode Island, and Washington, the required contributions that you make to state disability-benefit funds aren’t considered medical expenses limited by the 7.5% rule. Instead, you include these payments as part of your state tax deduction on Schedule A. TaxCut handles these entries in the interview for Form W-2.
In addition to the costs for your own medical care, you can generally include medical expenses that you pay for your spouse or your dependents. This includes medical bills that you paid for your former spouse that were incurred while you were still married, even if you’re now filing as a single taxpayer. Similarly, if you’re now divorced, you can include in your deductible medical expenses any qualifying bills that you pay for your children, even if they are claimed as dependents by your former spouse. You can also deduct medical expenses that you pay for any other person who qualifies as your dependent, as long as that dependent doesn’t earn more than the personal exemption amount ($3,400 in 2007) or file a joint return.
You can include only the medical and dental expenses that you paid in the current tax year, regardless of when the services were provided. If you pay for medical services by check, the day you mail or deliver the check is generally the date of payment. If you make an online payment or a payment by phone, the date reported on the statement that shows when the payment was made is the payment date. If you pay by credit card, the payment date is the date that the charge is made, not the date that you actually pay the bill.
The following medical expenses aren’t deductible:
The cost of diet food
Cosmetic surgery that isn’t related to a congenital abnormality, an accident, or a disease.
The Medicare tax on wages and tips paid as part of the self-employment tax or household employment taxes
Nursing care for a healthy baby
Drugs not approved by the FDA
Funeral, burial, or cremation costs
For more information on qualifying and nonqualifying medical expenses, see Publication 502, Medical and Dental Expenses.