I have found that medical expenses are the least understood area of tax deductions. Taxpayers tend not to know what medical costs can be deducted. I am surprised when I hear, “Oh, I can deduct my eyeglasses?” or “I didn’t know I could write off prescriptions.” What’s more is that many do not realize that chiropractic work, therapeutic massage, acupuncture, dental, health and long-term care insurance, among other costs are in fact, deductible. On the flip side, they don’t realize that cosmetic surgery, vitamins and supplements are not deductible.
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Below is what the IRS generally says about the deductibility of medical costs:
Definition of Medical Expenses
Medical expenses are the costs of diagnosis, cure, mitigation, treatment or prevention of disease, and the costs for treatments affecting any part or function of the body. These expenses include payments for legal medical services rendered by physicians, surgeons, dentists and other medical practitioners. They also include the costs of equipment, supplies and diagnostic devices.
Medical care expenses must be to primarily alleviate or prevent a physical or mental defect or illness. They do not include expenses that are merely beneficial to general health, such as vitamins or a vaccination.
Medical expenses include the premiums you pay for insurance that covers the expenses of medical care, and the amounts you pay for transportation to get medical care. Medical expenses also include amounts paid for qualified long-term care services and limited amounts paid for any qualified long-term care insurance contract.
Medical Expense Deduction
Folks also don’t realize that they need an extraordinary amount of medical expenses before seeing any deduction whatsoever. That is because once you add up all of your medical expenses, you must subtract 7.5% of your adjusted gross income (AGI) from the total and the remainder is what you are allowed to write off. For example, your medical expenses total $5,000 and your adjusted gross income is $50,000. The calculation of 7.5% of AGI in this example yields $3,750, subtracted from your total medical costs of $5,000 gives you a deduction of only $1,250.
On Form 1040, medical and dental expenses are deducted on Schedule A, Itemized Deductions. People with disabilities often must follow different rules regarding the deduction of medical expenses. The following list highlights some of the additional medical expenses a disabled individual can include in figuring the medical expense deduction:
--Artificial limbs, contact lenses, eyeglasses and hearing aids;
--The part of the cost of Braille books and magazines that is more than the price of regular printed editions;
--Cost and repair of special telephone equipment for people who are hearing impaired;
--Cost and maintenance of a wheelchair or a three-wheel motor vehicle commercially known as an autoette, improvements to a vehicle to accommodate a wheel chair;
--Cost and care of a guide dog or other animal aiding a person with a physical disability, including the dog’s food and vet bills;
--Cost for a school that furnishes special education if a principle reason for using the school is its resources for relieving a mental or physical disability. This includes the cost of teaching Braille and lip reading, and the cost of remedial language training to correct a condition caused by a birth defect;
--Premiums for qualified long-term care insurance, up to certain amounts;
--Improvements to a home that does not increase the home’s value, if the main purpose is medical care. An example is constructing an entrance or exit ramps, remodeling a bathroom to accommodate a disability;
--Travel and lodging for medical care is also deductible. So for example, say you must travel 500 miles to get the care you need for your condition. It doesn’t matter if you choose to drive or fly, you may deduct the cost of the trip as well as the lodging while you are there. In fact, if you travel locally to visit your doctor, dentist or other health practitioner, you may deduct mileage.
Bear in mind that you should store documentation in your tax file from your doctor confirming your disability and special needs.
Although this information is not all inclusive, it does include references that may assist with your specific circumstances. For more information go to www.irs.gov and check out Publication 502.
Impairment-Related Work Expenses
Impairment-related expenses are those ordinary and necessary business expenses that are:
-necessary for you to do your work satisfactorily;
-for goods and services not required or used, other than incidentals, in your personal activities; and
-not specifically covered under other income tax laws.
For these rules to apply, you must first meet the definition of disability. You have a disability if you have:
-a physical or mental disability (for example, you are blind or hearing-impaired) that functionally limits your being employed; or
-a physical or mental impairment (for example, a sight or hearing impairment) that substantially limits one or more of your major life activities, such as performing manual tasks, walking, speaking, breathing, learning or working.
If you have a disability, you can take a business deduction for expenses that are necessary for you to be able to work. If you take a business deduction for these impairment-related work expenses, they are not subject to the 7.5% limit that applies to medical expenses.
Where to Report Impairment-Related Work Expenses
If you are self-employed, deduct the business expenses on the appropriate form (Schedule C, C-EZ, E, or F) used to report your business income and expenses.
If you are an employee, you should:
1) Complete Form 2106, Employee Business Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses.
2) Enter on Schedule A (Form 1040), line 28, that part of the amount on Form 2106, line 10, or Form 2106-EZ, line 6, that is related to your impairment.
3) Enter the amount that is unrelated to your impairment on Schedule A (Form 1040), line 21.
Your impairment-related work expenses are not subject to the 2% of adjusted gross income limit that applies to other employee business expenses.
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know,” available at all major booksellers. Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.
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