Medical Expense Deduction: Don't Get Your Hopes Up

Q: Tax Playa, can I deduct my medical expenses off my tax return?
Kim, Washington DC

A: Medical expenses can be deducted off your tax return, but there are so many limitations to it that it is unavailable to most filers.  Only the uninsured who have catastrophic medical expenses are likely to be able to claim a benefit...

For more information on this, please consult IRS Publication 502, Medical and Dental Expenses.

There are several ways that health care is advantaged in the tax code:

1. Employer-provided health care can be paid for by your employer or be deducted from your paycheck, including insurance premiums or health reimbursement arrangements (HRAs)
2. The self-employed and more than 2% shareholder-employees of S-corporations can take an adjustment to income for health insurance premiums
3. Contributions to health savings accounts (HSAs) can be taken as an adjustment to income, paid for by your employer, or deducted from your paycheck
4. Persons affected by free trade agreements can take a health tax credit
5. Your employer can allow you to put money into a use-it-or-lose-it flexible spending account (FSA).

There is another tax advantage for health care that most people cannot take--the catastrophic health care deduction.

In Publication 502, there is a list of eligible expenses for this deduction.  In general, most expenses are eligible except:

• those reimbursed by insurance, a health account, or your employer
• cosmetic expenses
• non-prescription drugs
• obvious over-reaches like funeral expenses and veterinary bills

The deduction is only available to those 30% of taxpayers who itemize their deduction.

Furthermore, the aggregate medical expenses must be reduced by 7.5% of AGI (10% of AGI for those in AMT).  Whatever is left can be claimed as a deduction.

It's been my experience that very, very few taxpayers can claim this deduction.  The uninsured are better off getting an individual-market HSA so that at least the account contributions are deductible.

Comments

[Missy]

Hello!

I usually receive a refund of $3200-$3600 per year at tax time, and my income is usually in the $19,000-$23,000 range.

This year, I expected to make $25,000, so I enrolled in a dependent care FSA account (I have one child).
However, due to the fact that I took a paycut at my new job, I will only be making about $23,000. I put $1000 into my dependant care FSA for 2007, and used every penny (plus had additional childcare expenses of about $1000).

I heard that this FSA, since I'm in such a low income bracket, will mess up my EIC.
Is that true? I was counting on getting at least $3000 back, and have already budgeted this amount into my expenses for 2008.

Thanks for your help!