Health Care and the IRS

With national healthcare legislation so prominent in the news, a lot of us are thinking  about those ever-escalating medical costs more than usual. While it may not be free or universal, at least some help has been available to us for a long time now, thanks to the Internal Revenue Code.

The most common way the IRS lets us deal with healthcare costs is through itemizing our medical expenses on Schedule A. That basically means we can claim expenses for three kinds of out-of-pocket expenses: Our cost for health insurance; our actual medical and dental expenses, including required minimums and co-pays; and the cost of our prescriptions, such as pharmaceuticals, eyeglasses and contact lenses.

However, a less well-known provision allows for the cost of travel for medical purposes, up to 24 cents per mile. If treatment involves travel to another town, even the cost of accommodations can be deducted.

As with all tax deductions, there are rules and limits that need to be met. First of all, in order to be deductible, medical expenses must be for the purpose of alleviating or preventing a physical or mental defect or illness. Things that are merely “good for our health,” such as vitamins or gym memberships, are excluded.

Secondly, the intent of the rules permitting a deduction for medical expenses is to protect against the financial burden of catastrophic or chronic illness. Ordinary, year-in and year-out health costs are not what we mean by that.  Therefore, expenses must total more than 7.5% of adjusted gross income to be deductible. That means that if my adjusted gross income is $100,000, only my medical expenses in excess of $7,500 are deductible. So, if I have $8,000 in deductible health care expenses, only $500 can be claimed on Schedule A.

Itemizing deductions on Schedule A is not the only way the IRS has your back when it comes to the cost of health care. For instance, on line 25 of Form 1040 there is also an adjustment for health savings accounts, or HSAs. That means that if I qualify for an HSA, I can save up to $6,150 per year for out-of-pocket healthcare expenses, and deduct up to $11,900 per year in actual outlays.

Finally, there is also an adjustment, this time on line 29, for the cost of health insurance purchased by self-employed individuals, which puts them on even footing with other employers. Large companies can deduct the expense of providing health care insurance for their workers; why can’t the employer whose only worker is himself? In this case, eligible taxpayers can deduct all the costs of health care insurance or long-term care coverage, as long as the deduction doesn’t exceed the total net earnings of the business, minus the deductions for one-half of self-employment tax and contributions to a qualified retirement plan.

With the costs of health care coverage climbing by double-digit percentages every year, it’s nice to know there is something we can do to help alleviate at least some of that expense on our tax return. If you think you qualify for any of these deductions, check with me about it right away.