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Making the tax most of medical expenses

Happy second birthday health care reform!

It was on March 23, 2010, that Obama signed the Patient Protection and Affordable Care Act into law.

Doctor and young girl patient

Because of the way the measure is structured, only a few of the law's provisions are now in effect.

Most of the law's rules will phase in over the next few years if they survive the Supreme Court scrutiny. The high court will hear oral arguments next week on the constitutionality of the law's most controversial  component, the individual mandate.

And if Republicans gain power following November's election, one of their first moves will be to repeal the so-called Obamacare.

Meanwhile, as all this legal and political drama is playing out, you and I continue to get sick and and go to our doctors.

Thank goodness we have a much less divisive tax law that, for some of us, can help cover our health care costs: the deduction of medical and dental expenses.

How to maximize medical deductions is Today's Tax Tip.

Itemizing required: The main hurdle for most filers is how the medical expenses are claimed. You must itemize your health care costs on Schedule A.

Most taxpayers choose to claim the standard deduction.

Ease obviously is a big factor in chosing the standard deduction route. But the other reason the standard deduction is popular is that over the years the amount for each filing status has grown.

For 2011, the standard deduction amounts are:

  • $5,800 for single or married filing separately taxpayers,
  • $8,500 for heads of households, and
  • $11,600 for married couples filing a joint return or surviving spouses.

If all your itemized deductions aren't more than your standard deduction amount, there's no need to even think about itemizing.

The 7.5 percent tax deduction solution: Those who do itemize then must consider the added hurdle to deducting medical expenses, the 7.5 percent of adjusted gross income (AGI) threshold.

Unless all your medical (and dental) costs come to more than that percentage, then you can't count them on Schedule A.

Note the "more than" requirement. That means if your AGI is $30,000 then you must have IRS acceptable expenses of more than $2,250.

And then you can only claim the amount in excess of that percentage.

Our hypothetical filer with a $30,000 AGI and $3,000 in medical expenses can deduct just $750 of those costs.

Clearing the medical deduction hurdle: Everyone knows that co-pays for prescriptions and doctor's office visits count toward the itemized medical deduction amount.

But there are other less common medical treatments you can add up on your Schedule A. They include:

  • Travel costs to get to and from medical treatments and even to pick up treatments at your local pharmacy,
  • Insurance payments from already-taxed income, including a portion of long-term care premiums,
  • Alcohol- or drug-abuse treatments,
  • Laser vision corrective surgery,
  • False teeth, hearing aids, crutches, wheelchairs and guide dogs for the blind or deaf, and
  • Weight loss programs that a physician deems medically necessary.

Other medically necessary expenses also count.

This general category can include such things as your doctor telling you that you need to add a humidifier to your home's central air system to ease your child's asthma. In that case, the cost could be at least partially deductible.

And cosmetic surgery that's needed to correct a medical condition, not just for vanity's sake, can be deducted, too.

Some disability related home improvements also could count, such as adding ramps and widening doors for wheelchair access.

Just don't go overboard. These structural changes are deductible medical costs but only to the extent that they don't add value to your home. In those instances, the home improvements aren't immediately deductible as medical expenses, but since they add to you home's basis they could pay off on your taxes when you sell.

Keeping track of the allowable medical deductions and their rules is enough to give taxpayers a headache. But the remedy for such short-term filing pain could be some tax savings.

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