Increasing Your Tax Deductions for Medical Expenses
Written by Doug Beecher, MBA, CPA
Only a few people get to take the traditional medical deduction on their tax returns. First it requires itemizing deductions. Next, you have to subtract 7.5% of your income from your out-of-pocket medical expenses. If there is anything left when you are done subtracting, you get a tax deduction for only the difference. For example, if you itemize deductions and have $3,500 in medical expenses and $40,000 of income, your medical expense deduction will be $500. This is because 7.5% of $40,000 is $3,000, which leaves $500 when subtracted from your total medical expenses of $3,500.
This leads us to the obvious question: Is there anything you can do to increase your tax deductions for medical expenses? Here are a few answers:
Consider Filing a Separate Tax Return from Your Spouse
Let’s go back to our earlier example. Let’s suppose you are married, and each of you earn $20,000, but you personally incurred the $3,500 medical expenses. If you and your spouse file separate tax returns, you will only have to subtract 7.5% of your $20,000 income from the medical expenses. This will increase your medical tax deduction by $1,500. However, there are other benefits you may lose by filing separately. If you are considering this approach, be sure to get the help you need to completely compute your federal and state taxes both jointly and separately to find which is best for you this year.
If You Receive a 1099-MISC Form You May Be Able to Deduct All Your Medical Insurance Premiums
I purposely chose this wording for those of you who are self-employed, at least part-time, and may not think of yourself as self-employed. If you receive a 1099-MISC form, with income on line 7, you are self-employed.
If you are self-employed, and neither you nor your spouse is eligible for an employer sponsored medical insurance plan, then you can deduct all of the medical and dental insurance premiums you pay. This is especially valuable since you do not have to itemize deductions to qualify for this benefit!
Participate in Your Employer’s Flexible Benefits Plan
Flexible benefits plans, also known as Cafeteria plans, are allowed by Section 125 of the Internal Revenue Code. This is the best way to deduct your medical and dental insurance premiums, as well as any related out-of-pocket expenses. (It is also a great way to deduct a wide list of other items, notably child care expense).
When you participate in these plans, you don’t even have to wait to file your tax return to take the deduction! Instead the deduction comes out every payday, and it reduces social security and medicare taxes as well as income tax! (Your employer will also like it because it saves payroll tax for them as well, so if you do not have one of these plans available where you work, you may want to suggest it!).
There are several things you can do to increase your tax deductions for medical expenses. Most involve some advance planning, so be sure to get professional help if you need it. It could well be worth a thousand dollars or more to you!
The information in this article is intended to inform you of some of the financial opportunities provided in the tax laws or elsewhere. It is not intended to give you specific advice for your personal situation. If you need such advice, please contact a qualified professional!