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.

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On my dental plan I got two fillings and deep cleanings done in two visits, after having a previous office visit where I got x-rays and an initial cleaning. I got away with paying a total of $100. A filling can easily cost $86 where I live and yet I got away with paying only $100 for all the services I received. You do the math and tell me if having dental insurance is worth it.

Margie
A person with employer-sponsored dental coverage

I looked for something like this about a year and half ago when I started sourcing Healthcare/Benefits, etc. and could not find anything that told me what I wanted or felt I needed to know! (I thought I needed to be at least a little smarter than your average consumer since I was now sourcing the stuff, you know.) I went to Barnes and Nobles, DB Dalton, Walden, and every other Mom-and-Pop bookstore I could find. Nothing! At most, some of the books would have two or three pages dedicated to definitions and that was about it. I even said to one of the workers at Barnes and Nobles: “No, what I am looking for is A Guide to Healthcare for Dummies”. He said, “I’m not showing that one exists.” Well, now it does, and under a different title!

Thanks so much for the book.
Ronda

Brandt Williamson MD

1. I was diagnosed at UCLA Medical Center with MS and

2. I had brain surgery to relieve my congenital hydrocephalus, again at UCLA.

The symptoms I had with my MS were thought to be related to my hydrocephalus, but alas, it was indeed an MS diagnosis. Needless to say, being 3,000 miles from home, my mother badgered me into moving back to the great state of Tennessee.

I took a job with a large health care conglomerate in East Tennessee. I should have Cadillac health insurance, right? HA!

My company, which employs over 9k people in the area, has the worst health coverage of any plan I’ve ever had. And to add insult to my injury, until recently we owned a health insurance company!

My plan relies heavily on using only our facilities, which for MS, is not so great. My out of pocket deductibles for going to the university hospital are outrageous, even though the care is superior there.

I work in the marketing department so I was privy to some information about our new drug plan. We opened our own pharmacy which means we get my MS drug for half price under 340b pricing. That’s roughly $720 for a month’s supply. Under our insurance coverage, injectible drugs cost employees $150 a month. And the kicker? The comment was made that it only effected 65 people. I corrected them that it effected 66 people.

My great health care company is short sighted. An MS flare can cost 5k for each flare. Without drugs, MS patients can have multiple flares a year. Now I ask you, what’s more practical in the long run? Lowering the drug cost back to $60 a month like it used to be so that even the $8 an hour employee can afford them thereby reducing flares, which reduces costs and may mean that that employee may delay becoming disabled by years and sucking disability insurance dry, or keeping the drug cost at an outrageous $150 a month, meaning most employees have stopped taking their drugs, raising the incidents of flares and collateral effects? Lost wages, lost work production, lost quality of life?

Oh, and we have NO out of pocket maximum on our plan.

My company, a non-profit pillar of the community, cares only about the bottom line. Which was increased when Humana bought the health insurance arm of our company for $245 million this year.

I could take a job with better benefits at a lower pay scale and come out ahead.

It makes me so angry that I can’t get an actual person on the phone to work this out in real time. So, I still call and wait while keeping records of doing so.

A lot more goes into calculating your healthcare expenses than meets the eye. Unfortunately, most insurance companies fail to break the transaction down into simple math and explain how they got to what you owe. Here are the basics of EOB math.

The Basic Math

The key to understanding comes down to identifying four numbers: the provider charges (amount billed from doctor, hospital, etc.), the discount (which is based on the negotiated rate of your individual plan coverage), what insurance paid and patient responsibility. Insurances may call them different things, so we’ll describe those in a little more detail.

The amount the provider sent to your insurance company as their “charge” or “billed amount” should be the largest figure on the EOB. Next, find and subtract the “discount” to arrive at the allowed amount. This is the amount your insurance company and your provider agree is the fair amount to be paid.

Remember some insurance companies give you the full math. They may show you the discount, and then show you the resulting allowed rate, which should be less than or equal to the charged amount. Other companies only display the allowed amount and do not show the network savings or discount.

Patient Responsibility

Now look at the amount your insurance paid. It can be anywhere from $0 to the full allowed amount. Subtract what the insurer paid from the allowed amount. What’s left is the patient responsibility. To double check the math, add together the amount the insurance paid and the patient responsibility, it should equal the allowed amount which is sometimes referred to as the negotiated rate.

What do you owe?

The patient responsibility may NOT be the balance owed to your provider, depending on if the insurance company reflects your payments (including co-pays, pre-payments and any other payments you have submitted). If payments you have previously made (or will make) are NOT reflected on the EOB, you will need to subtract your payments from the patient responsibility amount to figure out the balance owed to the provider.

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