Do you know how much you spent last year on medical expenses? Do you care? Well, you should. Why? Taxes! The word recounts a time every spring when you need to organize your finances. Though, it’s probably not most people’s favorite time of the year (well, if you’re a CPA you may feel differently), this year may just be a chance for you to get some extra money on your return. It’s time to put that shoebox full of medical receipts and EOBs to work for you and your family (and hopefully save some dollars along the way).
While taxes can be intimidating, medical tax deductions don’t have to be. Itemizing your medical expenses to reduce the amount of taxes you owe is as simple as pulling together your receipts for payments and totaling the amount you paid in a given year for medical services, procedures, equipment, prescriptions, insurance premiums, and mileage. While it doesn’t necessarily sound like
“medical” terminology, dental expenses, vision expenses (glasses, contact lenses, exams), and hearing aids are even considered medical expenses for tax-purposes. Remember, you cannot deduct any of the expense covered by the insurance company, but you can deduct your co-pay and other out-of-pocket fees.
Yes! That’s right! Your medical expenses are tax deductible if they exceed 7.5% of your AGI (we will tell you about that later). To help you get started, a complete list of items that can be deducted is available at the end of this guide or go online to http://tinyurl.com/7la5t8
Finding Out If You Qualify
In order to qualify for a deduction, your medical expenses paid by you in 2008 have to be 7.5% or more of your Adjusted Gross Income (AGI). Your AGI is your income minus any adjustments from a 401k or other qualified investment (this would include your Health Savings Account contributions for the year). AGI is the last number at the bottom of your 1040 form.
Here’s an example: let’s assume your AGI for 2008 is $40,000. In order to benefit from claiming your medical expenses as part of your itemized deductions (instead of the standard deduction), the medical expenses you paid would have to be $3,000 or more.
Next Steps
Here’s what you need to do to take advantage of the deduction:
- Collect your receipts for all of the medical expenses paid in 2008 for you and your dependents.
- Organize receipts by each doctor, each hospital, each pharmacy, etc.
- Total the amount you personally paid to each of the providers.
- Multiply your AGI by 7.5% and compare to your total expenses.
- If your expenses are greater than 7.5% of your AGI, fill out IRS Schedule A form (found at http://www.irs.gov/pub/irs-pdf/f1040sab.pdf)
- Include the form with your tax return.
Additional Tips and Info
A commonly overlooked expense is Transportation. For 2008, mileage for the purpose of receiving medical care was deductible at 19 cents per mile for the first half of the year and 27 cents per mile in the second half of the year. Even if you just traveled locally, the miles can really add up, and might be the thing that puts you over the 7.5% threshold, so be sure to consider your allowable mileage, as well as any parking and/or airline flight expenses you may have incurred for medical care.
There are tools available to help you organize and track expenses throughout the year. One we are very familiar with (and it’s free) can be found online at www.changehealthcare.com. Here you can track your ongoing medical care and payments. At the end of the
year, use the reports section, select “All of 2008 in One Report.” And you’ll be ready to tackle your tax preparation … well at least this aspect of your taxes! Don’t you wish it was all this straight forward? Don’t just take our word for it, check it out at www.changehealthcare.com.
NOTE: In addition to all of the allowable deductions, there is an equally long list of expenses that are NOT deductible. For that list and more information, check out the IRS website at http://www.irs.gov/publications/p502/index.html. Both lists are on the next page of this document.
FURTHER NOTE: We’re not accountants, and we’re definitely not your accountant. Check with yours to be sure you qualify and file properly.
