Medical Expenses

What Are Medical Expenses?

Medical expenses are any costs incurred in the prevention or treatment of injury or disease. Medical expenses include health and dental insurance premiums, doctor and hospital visits, co-pays, prescription and over-the-counter drugs, glasses and contacts, crutches, and wheelchairs, to name a few. Medical expenses that are not reimbursed are deductible within certain limits.

Key Takeaways

  • Medical expenses are the costs to treat or prevent an injury or disease, such as health insurance premiums, hospital visits, and prescriptions.
  • These expenses are tax-deductible within certain limits.
  • For example, taxpayers with group health insurance coverage are generally not allowed to deduct medical expenses.
  • Only those who itemize their deductions are eligible to claim any medical expenses on Schedule A, and only those expenses that exceed 7.5% of the taxpayer's adjusted gross income (AGI) can be deducted.
  • Typical medical expenses that you may have to cover that are not reimbursed include copays, coinsurance, and deductibles. It can also include any other services that your health insurance will not cover, such as glasses, crutches, and wheelchairs.

Understanding Medical Expenses

Taxpayers with access to group health insurance coverage are seldom able to deduct medical expenses that are not reimbursed on their taxes. Only those who itemize their deductions are eligible to claim any medical expenses on Schedule A. Furthermore, only those expenses that exceed 7.5% of the taxpayer's adjusted gross income (AGI) can be deducted.

The Consolidated Appropriations Act of 2021 made the deduction threshold change from 10% to 7.5%, permanent.

The medical expense deduction is an itemized deduction, which means it can only be used if someone turns down the standard deduction to claim it. In 2021, the standard deduction for a single taxpayer is $12,550 (increasing to $12,950 in 2022), for married filing jointly it is $25,100 (increasing to $25,900 in 2022), and for the head of household it is $18,800 (increasing to $19,400 in 2022), which means most taxpayers won't want to itemize.

In general, it is advised to confirm with your insurance company beforehand what is and isn't covered under your insurance policy. This, however, might not always be possible, such as in the case of an emergency.

Example of Medical Expenses

Here's how someone deducts medical expenses from their taxes. First, calculate AGI by following instructions found on the first page of Form 1040. Take the result of that calculation and calculate 7.5% of that number. Subtract this result from total medical expenses for the year. The amount that's leftover is the amount you can deduct for medical expenses.

As an example, consider that Tom's AGI for 2021 was $80,000, and he had $10,000 in medical expenses. Using the AGI limit of 7.5%, he would subtract 7.5% of $80,000, or $6,000, from the $10,000 in medical expenses to get a result of $4,000—and that would be the figure he could claim as a medical expense deduction.

What Medical Expenses Are Deductible in 2021?

For the tax year 2021, and tax year 2022, individuals are allowed to deduct qualified and unreimbursed medical expenses that are greater than 7.5% of their adjusted gross income (AGI) for the specific tax year. Previously, the threshold used to be 10%. The floor was first reduced in 2017 through tax reforms. It has been made permanent in the Consolidated Appropriations Act of 2021.

What Medical Expenses Are Typically Not Covered by Health Insurance?

Health insurance covers most medical expenses, such as hospital visits, doctor visits, prescription drugs, home care, and wellness care. Health insurance typically does not cover elective procedures, such as plastic surgery, and beauty-related procedures. Some elective procedures might be covered by your health insurance company, depending on the type of procedure. First, check with your insurance company if they cover a procedure you are thinking about before going ahead with it.

What Are Out-Of-Pocket Medical Expenses?

Out-of-pocket medical expenses are any medical costs that you incur that are not covered by your health insurance company. These expenses, therefore, have to be paid by you, out of your money. Out-of-pocket medical expenses can include copays, deductibles, coinsurance, and any other costs that your health insurance does not cover. The Internal Revenue Service (IRS) allows you to deduct these costs on your taxes but only in the amount that is greater than 7.5% of your adjusted gross income (AGI).

Article Sources

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  1. Internal Revenue Service. "Topic No. 502 Medical and Dental Expenses." Accessed Nov. 17, 2021.

  2. Congress.gov. "H.R.133. - Consolidated Appropriations Act, 2021." Accessed Nov. 17, 2021.

  3. Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2021." Accessed Nov. 17, 2021.

  4. Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2022." Accessed Nov. 17, 2021.