Every year clients ask me what medical expenses are deductible and how they can claim such expenses on their tax returns. Unfortunately, as with many tax issues, there are many matters to consider when claiming dedical expenses and often the final amount that can be claimed s very disappointing, especially when concidering the recording keeping involved.

Internal Revenuc Code section 213 is the section of the tax code where the fun journey of exploring medical costs begins and the usual destination is the more "user friendly" IRS Publication 502.

Medical Expenses Included

According to IRC 213(d), medical care includes expenses incurred for diagnosis, cure , treatment, and prevention of disease or for purposes affecting the function and structure of the body. These amounts also can include payments for long term care services, health insurance, drugs, and transportation, and in certain cases, lodging.

Of course, a taxpayer must reduce the medical expenses to be claimed by any payments an insurance policy, either directly to the medical provider or as a reimbursement to the taxpayer.

When to Deduct Medical Expenses

One of the downsides to taking advantage ofclaiming medidcal expenses is the provision rlating to when to claim such expenses. Since medical costs often run in the thousands if not tens of thousands of dollars, a bery real problem arises when trying to claim expenses. Frequently, I see people who must make payments to their medical provider over a period of time that can sometimes straddle tax years. As you will see later, the provision that dictates costs must be deducted in the tax year paid as opposed to the year of medical services are provided, can cause a problem for taxpayers.

One potential solution to this problem is paying for the medical services by credit card. Although you still owe the same amount, and in your mind you still owe the medical expenses, the IRS dem the medical bills, "paid" at the time of the recording of the transaction on the credit card. Thus, the whole amount of the medical expense can then be claimed during that tax year. Of course now you have the medical expenses sitting on a credit card accruing interest generally at a very high rate. Should you opt for this method one must perform a careful analysis to see if the tax savings is worth the added cost of interest. There are other tax favorable options for handling medical expenses and you should contact your tax advisor to explore the options before medical needs arise.

Filing Status and Whose Expenses to Include

Should the married taxpayer contemplate the filling a tax return using the Married Filing Seperately status, there are some additional items. These concerns include whether live in a community property state or not. You must also be aware of special rules tat apply to expenses being paid from a jointly-owned account. You may claim expenses you paid for yourself, your spouse (oddly eve if you are filing separate), and your dependents.

Included Medical Costs---a Closer Look

Although th expenses covered are far too numerous to name here, I will attempt to provide some expamples of items that may be overlooked when calculating your medical expenses.

• Equipment such as crutches, wheel chairs, glasses, dentures, etc.
• Bandages
• Braille books and magazines
• Fertility enhancement
• Pregnancy test kits
• Birth control pills
• Guide dogs
• Health insurance premiums including Medicare Parts B&D and certain type of Long Term Care Insurance policies
• Stop smoking programs except over-the-counter medicines
• Weight loss programs if prescribed by a doctor to treat a specific disease such as obesity, hypertension, etc.
• Transportation expenses to receive medical care

Another item to be ducted, with careful calculations, is permanent capital improvements to a home to aid you or your dependents. However, if such improvements actually increase the value of your home you must first subtract any increase in home value from the costs incurred. Only the amont left, if any, is deductible.

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Medical Expenses not Included

There are certain expenses that can't be included. I only mention these becauseI am often asked by taxpayers if they can deduct them.

• Heath club dues. Although you can deduct fees for a weight loss progams proscribed for a diagnosed medical condition, the fees to use a health club are not deductible. ( If you pay a fee for a specific weight loss program at a club, then that is deductible.)
• Funeral cots
• Illegal medical procedures
• Over-the-counter medicines
• Nutritional supplement (unless recommended by a medical practitioner as a treatment for a specific condition)
• Health Savings Accounts (HSA) and Medical Savings Accounts (MSA). In a roundabout way you do receive tax benefits with these plans. Consult your tax advisor for a explaination of the tax benefits of these programs.
• Flexible Savings Accounts (FSA)
• Health Insurance Premiums funded with pre-tax dollars.
• Health Insurance Premiums for the self-employed. Similar to HSA's and MSA's listed earlier

The Bottom Line---the Deduction!

You have now gathered all of your documentation and you have excluded those items that don't qualify, and you are ready for that big monent for the tax deduction on Schedule A!

Her is where I hate to be negative, but I must bse a realist and tell you that most of the time after all of this work you still won't qualify for this deduction or is so only a minor amount! Here is the kicker: You must first complete page 1 of the Form 1040. The bottom line of page 1 of the Form 1040 is your "adjusted gross income" (AGI). You must reduce your total medical expenses by 7.5% of your AGI. The amount left after this reduction is your qualified medical expenses you can deduct of Schedule A of your tax return.

For example let's say you paid $5,000 in total medical expenses. However, your AGI is $100,000. Then $100,000 X .075 = $7,500. Subtracting ($5,000 - $7,500) leaves $0 medical expenses to deduct on Schedule A.

If your AGI was $50,000, 7.5% of your AGI would be $3,750 and you would be able to deduct $1,250 of your medical expenses on Schedule A. Congratulations!

Well, maybe we shouldn't celebrate too much yet. Here is the next test. You must have enouigh other itemizations (i.e., home mortgage interest, real estate taxes, charitable contributions, etc.) to beat the standard deduction. Therefore you could have enough medical expenses to claim, but if you don't have enough other "itemizations" to beat the standard deduction, you are better off with the standard deduction.

Unfortunately, after nearly 50 years of preparing my own tax return, and tax returns for my clients, I have found that most people who have enough medical expenses to qualify for a deduction are elderly or people with serious medical conditions. Generaly, elderly people who own a home have had it paid in full and have no mortgage interest to claim as an itemization. The problem is compounded for the elderly because after the age of 65 their standard deduction increases by an extra $1,400 dollars. The problem will be further magnified that the 2010 "Affordable Health Care Act" modify's the calculation of the medical expense deduction. Starting in the year 2013, medical expenses will have to be reduced by 10% of AGI instead of 7.5%. (For taxpayers over the age of 65 the increase won't take effect until 2016).

It may still be beneficial to track your medical expenses for taxpayers in states with income tax provisions. Your tax preparer should investigate the states requirements for deducting medical expenses because state tax codes can be different than the federal tax code.

This article is not meant to be an extensive explanation of IRC section 213, and has been made to be as informative as possible without diving into every specific situation. Thus, considering the "gotcha's" in this provision, I highly encourage you to do further research and/ or seek professional quidance before tackling this issue yourself.

The views expressed in this article are the opinions of the writer and do not represent the positions, strategies of opinions of H&R Block

Tags: Taxes Finance Family