Most taxpayers used the standard deduction even before 2017's Tax Cuts and Jobs Act made it even more appealing by essentially doubling the amounts.
Still, millions of filers every year find that claiming itemized deductions gives them a better tax result.
And medical expenses tend to be a big reason why they opt to itemize, especially when they know and claim all the possible health-related expenses.
Annual deduction choice: You're not locked into a deduction method for your full tax lifetime. You get to choose whether to itemize or claim the standard amount each filing season.
Those who make the itemize choice do so because those total allowable expenses entered on Schedule A come to more than their standard deduction amounts. For the 2020 tax year (and for 2021 if you're already tax planning ahead) they are:
- $12,400 for 2020 taxes ($12,550 for the 2021 tax year) for single and married filing separately taxpayers,
- $18,650 for 2020 taxes ($18,800 for the 2021 tax year) for head of household filers, and
- $24,800 for 2020 taxes ($25,100 for the 2021 tax year) for married couples filing a joint return and surviving spouses.
Making the most of medical expenses' tax value: There's some logic to the Internal Revenue Service placing medical and dental expenses at the top of Schedule A. Health care costs often are the main reason filers reach an itemized deduction amount that's greater than their standard claim.
But those medical expenses must be substantial before they are of any tax value. The Internal Revenue Code requires your medial claims exceed 7.5 percent of your adjusted gross income (AGI) before you can deduct them.
Here's a simple example of how that works:
Your AGI is $100,000, meaning you've got to have allowable medical costs of more than $7,500 ($100,000 x 7.5 percent). Your medical expense total is $10,000. That means you can claim $2,500 and not your full $10,000 in medical costs on Schedule A.
Since the percentage medical deduction threshold shaves a lot off potential medical tax savings, many taxpayers don't even both to look at the options.
But in addition to the usual medical costs that can be counted on Schedule A, there are some deductible health care costs that too many taxpayers tend to overlook. Plus, a new Internal Revenue Service ruling says some COVID-related costs now count as tax deductible medical expenses.
Here are 10 medical costs that could make itemizing worthwhile.
1. PPE purchases: Since we're still dealing with COVID-19, let's start with the newest medical tax deduction. Specifically, the IRS says in Announcement 2021-7 that the costs of personal protective equipment, aka PPE, purchased for the primary purpose of preventing the spread of coronavirus are deductible medical expenses. This includes face masks, hand sanitizer and sanitizing wipes. This tax-deduction addition applies to PPE used by the taxpayer, his or her spouse and dependents.
A quick note here about teachers. Educators get special consideration here, without itemizing. Certain school employees can claim up to $250 (it's adjusted annually for inflation, but it's been stuck at $250 for a while) that they spend during the tax year to provide their students and classrooms with necessary educational material. In February, the IRS ruled that certain COVID-19 protective items purchased for classroom use count toward this $250 above-the-line teachers' et al deduction.
2. Out-of-pocket medical fees: Even if you have insurance, you likely must meet a deductible before its coverage kicks in fully. The out-of-pocket payments you make to doctors, dentists, chiropractors, psychiatrists, psychologists, podiatrists and other medical professionals while you're working up to your deductible count as deductible medical costs. So do the copayments for prescriptions.
3. Noncovered medical costs: Having medical coverage doesn't mean every health-related situation or cost will be covered (unless you have a really, really good — and expensive — policy). In most cases, there are certain things that it won't cover. However, the IRS says you can deduct these items. They include your payments for dentures, prescription eyeglasses or readers, hearing aids, crutches, wheelchairs or other durable medical equipment. Laser vision corrective surgery also is tax deductible.
4. Medical insurance policy premiums: As for that health care, payments for medical insurance can be deducted as long as you are pay them out of your own pocket with after-tax dollars. This could be the case if where you work doesn't provide health care as a benefit and you buy it on your own. Note, however, that if you then get coverage through the Affordable Care Act marketplace, either the federal one at HealthCare.gov or one of the many state marketplaces, to obtain and qualify for the premium tax credit (PTC) to help you meet your policy's cost, you can't deduct the amount that's also covered by the PTC.
One cost that often runs up the deductible medical premium option is COBRA, the acronym for the Consolidated Omnibus Budget Reconciliation Act of 1985. This law allows former employees to continue the health care they had while working. However, they must pay the full cost, including the amount previously picked up by their bosses. Those hefty payments count as deductible medical expenses.
This year, however, those COBRA costs might not be as severe. A provision of the American Rescue Plan Act (ARPA), the coronavirus relief bill signed into law by President Joe Biden in March, calls for the federal government to pay the full COBRA premium amounts from April 1, 2021, through Sept. 30, 2022, for qualifying individuals. This obviously will help with the cash flow of those depending on COBRA. However, the amount covered by Uncle Sam during those six months is not tax deductible by the recipient taxpayer.
5. Medical mileage: Getting to and from the doctor also could provide a tax deduction. You can claim 17 cents per mile on your 2020 taxes (it drops to 16 cents per mile in 2021) for trips to medical treatments (and, in some instances, conferences), as well as when you drive to the pharmacy to pick up your prescriptions. The key here, as in all tax situations, is to keep thorough medical mileage records.
6. Medicare and supplemental policies: Premiums for traditional Medicare Part B, which covers most general medical treatments, and Part D, prescription drug coverage, are deductible, along with any Medigap, or supplemental, coverage are tax deductible. If you opt for Part C, an Advantage plan, instead of traditional Medicare, that cost also can be deducted. However, Medicare Part A, the basic hospital coverage, isn't tax deductible if Social Security pays these premiums, which typically is the case.
7. Long-term care policy premiums: Longer life spans have prompted many to purchase long-term care (LTC) insurances. A portion of those policy premiums is tax deductible.
Just how much of your LTC premiums you can claim on Schedule A are based on your age and are adjusted annually for inflation. For 2020, the deductible amounts by age range as noted in the instructions for Schedule A are:
- $430 if you're 40 or younger
- $810 if you're age 41 to 50
- $1,630 if you're age 51 to 60
- $4,350 if you're age 61 to 70
- $5,430 if you're age 71 or older
8. Special treatments: Inpatient alcohol and drug treatment programs, as well as weight-loss programs that are recommended by your doctor to reduce the health risks of obesity or hypertension are deductible. Programs to help you kick your nicotine habit also could be tax deductible, again as long as your doctor diagnoses a medical condition that could be remedied in part by your stopping smoking.
9. Residential health-related changes: Wheelchair ramps and other modifications you make to your home for medical reasons also are deductible. So are other medically-necessary changes, prescribed by a physician, such as adding a humidifier to your home's heating and air-conditioning system to relieve chronic breathing problems. Even a swimming pool or water feature could — and I emphasize could — be claimed if your doctor determines pool workouts or spa or hot tub treatments will alleviate or prevent your ailment. This means the costs, per your physicians' decision (and IRS Publication 502) are Residential necessary for the "diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body."
10. Not-just-cosmetic costs: It's well-known that plastic surgery generally is not an allowable medical deduction. In some cases, though, cosmetic surgery costs can count. This is the case for individuals who pay for breast reconstruction surgery, as well as breast prosthesis, following a mastectomy for cancer. On a less invasive level, you also can include in medical expenses the cost of a wig purchased upon the advice of a physician for the mental health of a patient who has lost all of his or her hair as the result of a disease.
Diagnosing your medical write-offs: Again, medical costs can help increase your annual deduction amount, but it takes some work to find them and ensure they meet the IRS standards.
But if you did encounter large medical costs last year, or find the doctors' bills already adding up in 2021, take a look at the medically deductible tax possibilities.
You can find the full alphabetical list of deductible medical expenses — from acupuncture through oxygen and ending with X-ray — in IRS Publication 502. (I'm still searching for a tax-allowable medical cost that starts with Z aside from Zyrtec, which falls in the prescriptions category.)
Or if you don't want to browse its 28 pages, you can use the IRS' interactive see Can I Deduct My Medical and Dental Expenses? online tool.
You just might find itemizing medicals costs is the best tax Rx.
You also might find these items of interest:
- 23 tax deductions, no itemizing required, on Schedule 1
- Do you have more time to use FSA money? Here are 6 spending suggestions
- Pleasant medical tax surprises: No more unexpected medical bills, permanent 7.5% itemized healthcare costs threshold