The Medical Expense Deduction is an itemized deduction that allows individuals to deduct unreimbursed payments for medical care, prescription drugs, and medical insurance premiums from their taxable income, provided these expenses exceed 7.5% of their Adjusted Gross Income (AGI).
Adjusted Gross Income (AGI)
Adjusted Gross Income (AGI) is a measure of income calculated from your gross income and used to determine how much of your income is taxable. It includes things like wages, dividends, and capital gains, minus specific deductions.
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Types of Medical Expenses That Qualify
Different types of medical expenses qualify, including:
- Payments for Medical Care: Costs associated with diagnosis, cure, treatment, or prevention of disease.
- Prescription Drugs and Insulin: Costs for drugs prescribed by a healthcare provider.
- Medical Insurance Premiums: Premiums paid for policies that cover medical care.
Calculating the Deduction
To calculate the deduction, follow these steps:
- Determine Your Total Medical Expenses: Sum all qualified expenses.
- Calculate 7.5% of Your AGI: This is your threshold amount.
- Subtract the Threshold from Your Total Expenses: Only the portion that exceeds this threshold is deductible.
Example Calculation
Suppose your AGI is $50,000, and you have $7,000 in qualified medical expenses:
- Threshold: \(0.075 \times 50,000 = 3,750\)
- Deductible Amount: \(7,000 - 3,750 = 3,250\)
Thus, $3,250 would be allowable as a deduction on your tax return.
Historical Context
The threshold for medical expense deductions has varied over time. Initially higher, it has been set at 7.5% of AGI for a long time but increased to 10% from 2013 to 2016 before being reverted to 7.5%.
Special Considerations
Certain items and treatments have special rules:
- Capital Expenses: Improvements or special equipment installed in a home.
- Long-Term Care Services: Eligible if they fall under specific criteria.
- Travel Costs: Expenses related to travel for medical care, again under certain conditions.
Comparison with Standard Deduction
Choosing between the standard deduction and itemizing depends on your total of itemized deductions. If your medical expenses, along with other itemized deductions, surpass the standard deduction, itemizing may save more on taxes.
Related Terms
- Itemized Deduction: Deductions that taxpayers list separately on their tax returns.
- Standard Deduction: A fixed dollar amount that reduces the income you’re taxed on.
- Taxable Income: The amount of income used to calculate an individual’s or a company’s income tax due.
- Gross Income: All income from whatever source derived.
FAQs
Q: Can I deduct over-the-counter drugs? A: Generally no, unless prescribed by a doctor.
Q: Are gym memberships deductible? A: Usually not unless medically necessary and prescribed by a healthcare professional.
Q: Can I include medical expenses paid for dependents? A: Yes, eligible expenses for dependents can be included.
References
- IRS Publication 502: Medical and Dental Expenses
- Internal Revenue Code (IRC)
- Tax Cuts and Jobs Act (TCJA) of 2017
Summary
The Medical Expense Deduction is a vital tax provision that helps mitigate high healthcare costs for taxpayers. By understanding the rules, thresholds, and eligible expenses, individuals can potentially lower their taxable income, leading to tax savings. Always consult the latest tax codes or a tax professional for current regulations and personalized advice.
