Relief from medical debt doesn't top the typical holiday wish list. But help with unexpected medical bills could be a welcome gift for millions of Americans.
Four in 10 U.S. adults received a surprisingly high medical invoice within the last year, according to a September survey from the nonprofit Kaiser Family Foundation. And medical bills topped the list of financial commitments that Americans are afraid they won't be able to afford, ahead of prescription drugs, rent or gas, according to the results.
Here are some tips for helping a loved one with their medical expenses — and potentially lowering your own tax bill along the way.
WHO GETS THE MONEY?
When helping someone shoulder medical bills, financial experts say the most important step is to make sure you pay the money directly to the hospital, physician or medical provider. Those payments are exempt from federal reporting and tax requirements, but only if they go to the business or person that provided the service.
"You can't give the money to your neighbor and then have them pay their own expenses," explained Melissa Labant, an executive with the American Institute of Certified Public Accountants.
Payments to friends or family members exceeding $15,000 per year must be reported as a gift to federal tax officials, who track them as part of lifetime gift limits. The vast majority of Americans will never have to worry about reaching the threshold: You can give up to $11.4 million to an heir or loved one before having to pay any federal taxes, under 2019 tax rules.
CAN YOU DEDUCT THE PAYMENTS FROM YOUR OWN TAXES?
Only for certain medical expenses and only for dependents.
They must be a family member or part of your household, which can include grandparents, cousins, in-laws and adopted children. You must also show that you provide at least 50 percent of their financial support, which can include the value of housing.
If the person meets those requirements, you can deduct medical expenses exceeding 10 percent of your annual gross income from your tax return. So an individual earning $100,000 in 2019 could deduct medical expenses over $10,000.
Those sky-high expenses usually only occur in the last year or two of life, according to Labant.
"That's when the numbers get big enough and make enough of a difference that the accountants hear about it," she said.
WHAT EXPENSES QUALIFY?
When it comes to medical expenses, tax law is very broad, encompassing just about anything used to treat, diagnose or prevent a medical condition: surgery, rehabilitation, prescription drugs, eye glasses, weight loss programs and even quit-smoking aids are included.
Cosmetic procedures and over-the-counter medications generally do not qualify.
SPENDING AND SAVINGS ACCOUNTS
Employer-sponsored accounts can be another way to pay for medical expenses, though there are important limitations.
Many companies offer health savings accounts or flexible spending accounts, both of which allow employees to set aside tax-free money for medical expenses.
Health savings accounts are considered superior, allowing a family to contribute up to $7,000 in 2019, collect interest and roll over any leftover money to the following year.
Flexible spending accounts are similar but cap contributions at $2,700 next year. Generally, the money is "use it or lose it," with any leftover funds forfeited at the end of the year. However employers can permit workers to carry over up to $500 to the next year.
Health savings accounts are "much better, hands down, because you get the same pretax contribution, but it rolls over every year," says Chris Schiffer, an accountant and financial planner with AEPG Wealth Strategies.
Plans vary, but generally money from either type of account can only be used for yourself, your spouse or a dependent.