Can you deduct medical expenses in 2021? Are your medical expenses tax deductible? Yes… but…
Medical Expenses Tax Deduction Limit
Medical expenses are tax deductible for 2021, but only after they exceed 7.5% of your income. You also must itemize your deductions to claim the medical expenses tax deduction. Finally, medical expenses are deductible in the year you PAY them, not when they happen. If you’re going to hit the medical threshold in 2021, then pay as many as you can by December 31. If you are not going to hit the threshold, push as many medical expenses as you can into 2022. What does this all mean exactly? Let’s dig in.
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The tax deduction for medical expenses has a floor of 7.5% of income. By income, the IRS means your adjusted gross income (AGI). Usually, when the IRS has rules or regulations that refer to income, they mean your AGI. Your AGI is calculated on your Form 1040. Your adjusted gross income shows up on Line 11.
Your total income is basically all of your income from wages, capital gains, interest, dividends, Social Security, business income (if any) and pensions added together. Your adjusted gross income is your total income minus any “adjustments” which are calculated on Schedule 1. For most people Schedule 1 contains your retirement plan contributions, your HSA deduction, your student loan interest deduction, the deductible part of self-employment tax, and your tuition deduction. There are a couple more things for educators and members of the military.
Once you have that number, multiply it by 7.5%. That is the amount you cannot deduct of medical expenses.
How Much of Medical Expenses is Deductible?
Once you hit the 7.5% floor, you can deduct the amount of medical expenses OVER 7.5%, but you can never deduct that first 7.5% of expenses. That’s on you.
As an example, let’s assume a taxpayer with an adjustable gross income of $100,000.
7.5 percent of $100,000 is $7,500.
This taxpayer can deduct the amount OVER $7,500.
Let’s say they have $14,000 in medical expenses for the year.
They can only deduct $6,500 of medical expenses. $14,000 – $7,500 = $6,500. The first $7,500 cannot be deducted, even though the taxpayer crossed the minimum threshold.
The good news is that there is no income limit for deducting medical expenses. The bad news is that the higher your income, the more medical expenses that are not deductible because of the way percentages work.
What Medical Expenses Are Allowed as a Tax Deduction?
There are always little exceptions, so if you have unusual family dynamics, or unusual medical conditions or situations, get thee to a tax professional. Otherwise, the rest of this will apply to most people.
Remember, you have to itemize your tax deductions to take the medical expense deduction. If you’re taking the standard deduction, just move along. Buy a cool notebook from Amazon or something. None of this applies to you.
Generally, you can deduct the medical expenses of the people you claim as a dependent on your taxes, spouse, children, and qualifying relatives. Add up all those expenses together.
Eligible medical expenses are the normal things that you think of (doctor visits, hospital bills, and so on), but also anything for the treatment or mitigation of a disease or physical condition. So, things like crutches, knee braces, heating pads, and so on also count.
Mental health professionals, chiropractors, and dentists all count. And, as a parent of two kids myself, know that your ORTHODONTIST and braces DO COUNT!
You can deduct mileage going to and from medical appointments, or other medical purposes, but you don’t get the standard IRS mileage rate. You have to use the lower medical expenses mileage rate.
There is a big, long list straight from the horse’s mouth in IRS Publication 502 starting here.
Can I Deduct My Health Insurance Premiums?
OK, here is a gotcha. You can deduct your health insurance premiums BUT if you are one of the many Americans who has their health insurance premiums taken out of your paycheck pre-tax by your employer, then you CANNOT deduct those (you already deducted them by taking them out pretax). You also can’t deduct any part that your employer pays. Typically, COBRA insurance premiums are deductible unless your former employer paid some or all the premium as part of your severance package.
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As always, you need to have documentation to deduct your health insurance expenses, so save all those receipts, or even better scan them in so that you have them if you need them. You do not submit that documentation when you file. You just have to produce it if the IRS asks, or if you get audited.
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