As COVID-19 testing markedly expands under President Biden’s recently announced six-point national strategy, people who use at-home tests may be able to have their out-of-pocket costs covered in full.
- The costs of home COVID-19 tests are eligible medical expenses, the IRS says, making them reimbursable under FSAs or HSAs and tax-deductible for some taxpayers.
- To be eligible for a tax deduction, your total unreimbursed medical and dental costs must exceed 7.5% of your income.
- Demand for at-home tests is surging along with the Delta variant, which has led to supply constraints and calls to ramp up production.
What's Eligible for Reimbursement or a Deduction?
The IRS last week reminded taxpayers that the cost of at-home COVID testing is an eligible medical expense. That means it qualifies as a tax deduction or for payment or reimbursement by flexible spending accounts (FSAs), health savings accounts (HSAs), health reimbursement arrangements (HRAs), and Archer medical savings accounts that remain active.
The cost of personal protective equipment (PPE) bought to prevent the spread of COVID-19—including masks, hand sanitizer, and sanitizing wipes—is an eligible medical expense, as well.
Taxpayers who itemize and whose expenses aren't reimbursed can deduct both the cost of home testing kits and PPE to the extent that their total eligible medical and dental expenses in 2021 exceed 7.5% of adjusted gross income.
Demand for Home Tests Escalates
The IRS reminder comes as demand for at-home COVID-19 tests—already surging during the Delta variant's spread—is expected to rise sharply as the White House plan boosts testing access and production.
Biden has proposed using the Defense Production Act and other procurement processes to expand production capacity to support COVID-19 testing at home and elsewhere. Under the plan big retailers like Amazon, Kroger, and Walmart will sell at-home rapid COVID-19 tests to consumers at cost (up to 35% less than the usual retail price) for the next three months.
A recent study found that adults have a strong preference for at-home test kits over drive-through or clinic-based COVID testing. But recent reports also indicate that such tests have been harder to come by on pharmacy shelves, given the brisk demand in recent weeks.
Late last month, for example, CVS said it was limiting customers' purchases of its rapid, over-the-counter COVID-19 tests both online and in-store, while suppliers worked to ramp up the pace of production.
At-home COVID-19 tests first became available in stores this spring.
How Health Reimbursement Accounts Work
If you don't already have a health reimbursement account at your job, here are some basics on how they work.
- Health savings accounts (HSAs) have three tax advantages: Your money goes in pretax (or is tax-deductible in some cases), grows tax-free, and comes out tax-free for qualified medical expenses. HSA funds can be used anytime, and any unspent money rolls over each year with no time limit. To be eligible for an HSA, you must participate in a high-deductible health plan (HDHP).
- Flexible spending accounts (FSAs) have similar tax advantages to HSAs, although the carryover rules are more stringent. Normally, employers can either allow a portion to roll over into the next calendar year or provide a grace period of 2.5 months to spend the money after the end of the plan year. These rules were loosened because of the pandemic, however, giving employers more flexibility to let workers keep and spend unlimited amounts in 2021 and 2022. You do not have to participate in a high-deductible health plan to be eligible for an FSA.
- Health reimbursement arrangements (HRAs) are employer-funded group health plans—not accounts—that reimburse you tax-free for qualified medical expenses up to a fixed dollar amount per year. Any unused amounts may be rolled over.