Medical and Dental Expenses – A Commonly Overlooked Deduction

Doctor’s bill weighing you down? Don’t sweat it! They might be deductible. In fact, there are a lot of clients that we work with who are not aware of the fact that those costly doctor’s visits can benefit you come tax time. Here is a list provided by the IRS to see if your medical and dental expenses are deductible. This version is simplified so that you do not have to be a tax professional like me to understand terms like “AGI threshold” and “qualified expenses”:

1. All “qualified” medical and dental bills paid out of pocket that are above 7.5% of your Adjusted Gross Income(calculated on Line 37 of Form 1040). Qualified bills will be explained below.

2. The first qualification test is that YOU must pay the expenses. They cannot be paid by your employer or insurance company. Such examples would be deductibles, co-pays or health insurance premiums that are not withheld from your paycheck.

3. The second qualification test is that your expenses MUST be paid for you, your spouse or anyone you claim on your tax return such as: children, friends/relatives that you support financially and live with you or elderly/disabled relatives that you support, but live outside of your household. In addition, if you are divorced or separated and the other parent claims your child, you can still deduct any qualified expenses you pay out of pocket for the child.

4. The third qualification test is that the expenses need to be “paid for the prevention or alleviation of a physical or mental defect or illness.” This can include a variety of expenses, ranging from doctor prescribed weight-loss or smoking cessation programs to any prescription medication you are taking. This does NOT include any voluntary weight-loss programs or over the counter medications(except for insulin).

5. In addition to the expenses above, mileage and/or transportation costs for medical care are also deductible. For example if you have to use public transportation to get to the doctor, save those receipts. Likewise, if you drive your own car, keep track of the mileage, especially if you have to drive out of state to receive medical care. In addition, tolls and parking fees are deductible. What is not covered is any international medical travel, so if you live near the Canadian or Mexican border and get your medications or treatment there, you cannot deduct these expenses.

6. If you have a Health Savings Account or Flex Spending Arrangement at work and have to withdraw any money for medical purposes you can do so without having to pay any tax on this distribution.

So to summarize – the health expenses must be above 7.5% of your AGI, they must be out-of-pocket expenses that are not reimbursed, they must be for yourself or anyone else listed or claimed on your tax return(or your child if you are divorced and still pay for their medical care), they must be to prevent or alleviate a physical or mental defect or illness, you can deduct mileage and/or transportation costs and finally, any distributions from Health Savings plans used for the qualified expenses explained above will not be taxable.

Please note that this list is only a recommendation and is not a substitute for a one on one consultation with your tax professional. If you would like to consult with myself or one of my fellow Tax Patriots, please contact us and we will assist you in any of your tax issues.

How to Get Affordable Medical and Dental Insurance Plans

Finding affordable medical and dental insurance plans can be as difficult as it is important.

Your family’s overall health depends on everyone getting regular checkups so that problems can be treated while they’re small and manageable. But where can you find cheap health coverage for yourself and your family?

Consider Your Options

If your employer offers health insurance benefits, participating in that policy is usually your cheapest option. However, you may work part-time or for a small company that doesn’t offer benefits.

Alternatively, you may be self-employed or unemployed. Does that mean you have to give up on having inexpensive health coverage? Fortunately, the answer is no. You still have some options available to you.

One option is to find a group that you can buy insurance through, such as a professional organization or a credit union. Like businesses, groups benefit from lower costs because the risk is spread over more people.

Another option is to buy your own individual or family plan. While this option can be pricey, you can lower your costs in several ways.

Lowering Your Costs

One way to lower your costs is to choose and HMO or PPO plan. With one of these types of plans, you pay lower premiums in exchange for choosing a health care provider from a specified list.

Another way to lower your costs is to search for a policy from an insurance comparison website. On one of these websites, you fill out a simple online form with information about yourself and your insurance needs. Once you submit the form, you’ll receive quotes from multiple companies.

Using a comparison website, you can quickly and easily compare quotes from several companies and be able to choose the least expensive quote that meets your needs.

On the best comparison websites, you can also talk with an insurance professional and get answers to your questions, plus get advice on how to lower your premium.

Alternative Minimum Tax – Medical and Dental Expenses

The itemized deduction for medical and dental expenses is an item that affects a significant number of individuals who are stuck in the Alternative Minimum Tax. Depending on the type of health insurance an individual has (high deductible plan with a Health Savings Account versus a high amount of coverage with a small copay), and the type of expense incurred (elective procedures versus immediate medical needs), there may be some fairly easy opportunities for AMT savings. The key to this is in the timing of when the medical bills are paid.

For the Regular Tax, an itemized deduction is allowed for medical expenses paid during the year. A tax benefit is received, however, only to the extent the expenses exceed more than 7.5% of the taxpayer’s adjusted gross income (AGI). AGI is the number on the last line (Line 37 for 2009) of page one of the Form 1040.

For purposes of the AMT, however, there is a slight difference – the threshold a taxpayer must exceed is 10% of AGI, instead of 7.5%. This difference in the computation is the AMT item reported on the Form 6251. The tax-saving strategy for medical expenses is essentially the same for the AMT as it is for the Regular Tax, but it also requires keeping an eye on that 2.5% difference. As mentioned above, the key is when the medical expenses are incurred and, most importantly, when those expenses actually are paid.

If an individual currently is in the AMT, to the extent any elective surgery, dental, vision work, etc. could be delayed until next year (so long as these expenses are not covered by medical insurance, and are not cosmetic improvements that would not be deductible medical expenses in the first place), consideration should be given to doing so. If the taxpayer is not in the AMT next year, a tax benefit might be achieved that would not be obtained this year. Also note that, even if the individual is in the AMT again next year, to the extent a grouping of medical expenses results in exceeding the10% threshold, the taxpayer will at least get a benefit for that amount.

For example, assume AGI is $100,000 and that it will be the same next year. The taxpayer decides to get “fixed-up” a bit, and the list includes a physical exam with diagnostic tests and x-rays, seeing the dentist for braces, and Lasik eye surgery – all together, $20,000 in medical expenses. For a taxpayer in the AMT, it would be a disaster to do half of this now and half next year – the total after-tax cost would be the full $20,000. If instead all the work is done in one year, the IRS offers a nice subsidy – as much as $2,800 for an AMT payer ($20,000 less $10,000 (10% of AGI), multiplied by the 28% AMT bracket).

Even better, if in this example the taxpayer is in the AMT this year but through tax planning will not be in it again next year, the IRS’ subsidy possibly could be $5,000 ($20,000 less the 7.5% of AGI, times the 39.6% bracket – the expected highest Regular Tax bracket in 2011).