Can I Claim a Deduction for Medical Expenses?

By Selena Maranjian Markets Fool.com

There are lots of families who make irresponsible purchases. There are also a lot of families who have debt on credit cards because they use those credit cards to pay for medical bills. Elizabeth Warren

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There's no doubt about it. Healthcare costs are a big deal, recently topping $3 trillion and accounting for more than 17% of our gross domestic product (GDP). Per person, that's about $9,900, with much of it paid out of pocket.

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If you're like the many millions of Americans who pay for healthcare, you might want to learn more about our tax laws, as you may be able to claim a deduction for medical expenses, lowering your tax bill and saving a lot of money.

How a medical deduction works

One of the many kinds of deductions that we can take when preparing our tax returns is a deduction for medical expenses. These deductions can reduce your taxable income -- and, therefore, the tax you'll have to pay. Have taxable income of $75,000 and $5,000 in deductions? Presto -- your taxable income is now $70,000. If you're in the 25% tax bracket, you avoid being taxed on that $5,000 and save $1,250. If you have $10,000 in deductions and are in the 33% tax bracket, you can save $3,300! The medical tax deduction can be quite powerful.

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Of course, as with all tax-related matters, there are rules you'll have to follow and criteria you'll have to meet. While some tax deductions have few limits, the deduction for medical expenses has a big one: You can only deduct the portion of your qualifying medical expenses that exceed 10% of your adjusted gross income (AGI). (Your AGI is your gross income less certain adjustments (such as contributions to a traditional IRA.) Thus, if your AGI is $60,000 and you have $6,000 or less in qualifying medical expenses, you'll get no tax relief. If you have $7,000 in qualifying medical expenses, though, you can take a $1,000 deduction. If your AGI is $100,000, you'll only be able to deduct the amount of qualifying expenses that exceeds $10,000.

That threshold used to be 7.5%, but it was increased to 10% beginning in 2013. Older taxpayers (those 65 or older) have been allowed to keep the 7.5% threshold through the 2016 tax year. For the current tax year and the foreseeable future, they face a 10% threshold, too.

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Which medical expenses qualify?

Another restriction is that the medical expenses you can deduct must be "qualifying" ones. The IRS provides a long list of allowable expenses, along with many examples of expenses that wouldn't qualify. The kinds of medical expenses that the IRS permits you to take deductions for are related to the following products, treatments, conditions, and services, among others.

Acupuncture
Alcoholism treatment
Ambulance
Annual physical exam
Artificial limbs
Artificial teeth
Bandages
Birth control pills
Body scans
Braille reading materials
Breast pumps and supplies
Breast reconstruction surgery
Chiropractor
Contact lenses
Crutches
Dental treatment
Diagnostic devices
Drug addiction treatment
Drugs
Eye exams and eyeglasses
Eye surgery
Fertility treatments
Hearing aids
Home care services
Home improvements
Hospital services
Insurance premiums
Lab fees
Lead-based paint removal
Legal fees related to healthcare
Long-term care
Medical conferences
Nursing homes
Nursing services
Osteopaths
Oxygen
Pregnancy test kits
Prostheses
Psychiatric care
Psychological counseling
Service animals
Smoking cessation programs
Special education
Sterilization
Surgeries
Therapies
Transplants
Weight-loss programs
Wheelchairs
Wigs
X-rays

Note that every expense related to any topic listed is not automatically allowable. Health insurance premiums, for example, are on the list above, but you can't deduct any portion of those that are paid through your paycheck because they already bypass taxation. With weight-loss programs, you can deduct some expenses related to treating a doctor-diagnosed condition, such as obesity or high blood pressure. These would include membership fees for a weight-loss program, but not fees for gym membership -- though you may be able to deduct specific expenses incurred at a gym, such as personal-training fees. It can be a bit tricky.

For more details on any items of interest, check out the IRS list and read up on the rules.

Health-related expenses that don't qualify as deductible include tooth-whitening, the aforementioned gym membership fees, cosmetic surgery, hair removal, hair transplants, dancing lessons, maternity clothes, nonprescription drugs, veterinary fees, funeral expenses, toothpaste, vitamins, and diaper services.

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Medical money strategies

If you have sizable medical expenses, this deduction can be a great help come tax time, saving you a lot of money. Just be sure to follow the rules and don't try to stretch them. Be sure that the expenses you're including all qualify. Also, understand that above-average medical deductions can draw the attention of the IRS and will sometimes result in an audit. That can sound scary, but there's nothing wrong with an audit if you've done nothing wrong.

If you find that you don't have enough qualifying expenses to exceed the 10% threshold, see if you can "bundle" some of your expenses. (Bundling can also help if all your deductions together aren't quite exceeding the standard deduction.) Bundling involves concentrating deductions in every other year, so that you're able to itemize in one year and take the standard deduction in the next. For example, you might make annual charitable contributions in both January and December of every other year -- that way you have heftier expenses every other year. If you have upcoming major medical expenses (such as a hip replacement, eye surgery, or orthodontia), you might move them up or push them back as needed, if that's reasonable, health-wise.

Finally, be sure you know about and consider making use of Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs). Contributions to them are made with pre-tax money, shrinking your taxable income -- and a smaller AGI can help you exceed the 10% deduction threshold. Note that you need to have a qualifying high-deductible health insurance plan to be able to take advantage of HSAs. They can be well worth it, though, as they let savings accumulate and grow over time, not taxing withdrawals for qualifying medical expenses. After age 65, you can withdraw money from an HSA for any purpose, paying ordinary income tax rates on withdrawals. Any unused amounts can be rolled over from year to year, unlike FSA money, which is mainly use-it-or-lose-it from year to year. (Still, even that can be very helpful.) Contribution limitsfor Health FSAs are $2,550 for 2016 and $2,600 for 2017. For HSAs, contribution limits for individuals are $3,350 for 2016 and $3,400 for 2017. For families they're $6,750 for both years. Those 55 or older can chip in an additional $1,000.

It's no fun having to spend a lot of your hard-earned money on medical expenses, but thanks to our tax laws, those expenses may help you shrink your tax bill and save money.

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