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.
- 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. They 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 2022, the standard deduction for a single taxpayer is $12,950 (increasing to $13,850 in 2022). For married filing jointly returns, the standard deduction in 2022 is $25,900 (increasing to $27,700 in 2023). For head-of-household returns, the standard deduction is $19,400 (increasing to $20,800 in 2023).
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.
Calculating 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 your total medical expenses for the year. The amount that's left over is the amount you can deduct for medical expenses.
As an example, consider that Anuj's AGI for 2022 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.
"Medical expenses" go far beyond doctor visits for physical ailments - consider expenses paid for dental, mental, or nontraditional health reasons.
Example of Medical Expenses
The IRS provides a list of medical expenses that qualify to be considered as part of an itemized deduction. Deductible medical expenses include but are not limited to:
- Payments to doctors, dentists, surgeons, chiropractors, and other nontraditional medical professionals.
- Payments for in-patient hospital care or residential nursing home care.
- Payments for weight-loss programs, smoking cessation programs, acupuncture treatments for addiction, or prescription medication.
- Payments for prescription eyeglasses, contact lenses, hearing aids, wheelchairs, guide dogs, or other items purchased to aid physical disabilities.
- Payments for transportation to medical care facilities including standard mileage rate calculations.
Exclusions to Medical Expenses
The IRS does not permit certain types of medical expenses to be included in an itemized deduction. You can't deduct funeral or burial expenses, nonprescription expenses, toothpaste, toiletries, cosmetics, or most cosmetic surgery.
To deduct a medical expense, you must have incurred the expense during the corresponding tax year. You can't take a deduction for any medical expense in which you've received a reimbursement for, regardless of the source of that reimbursement.
What Medical Expenses Are Deductible in 2022 and 2023?
For tax years 2022 and 2023, 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. Prior year thresholds for this limit 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 with 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).
The Bottom Line
Taxpayers that incur a large number of medical expenses may receive favorable tax benefits. These medical expenses must be compared to 7.5% of the taxpayer's MAGI. If the expenses exceed this threshold and the prospective benefit is greater than the standard deduction amount, a taxpayer may have their federal income tax liability reduced.