Understanding Deductions for Medical Expenses

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

According to the IRS, medical care includes expenses incurred for diagnosis, cure, treatment, and prevention of disease or for purposes affecting the function and structure of the body.

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

What’s Included In Medical Expenses?
According to the IRS, 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 made by 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 of claiming medical expenses is the provision relating to when to claim such expenses. Since medical costs often run in the thousands if not tens of thousands of dollars, a very 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. This provision dictates costs must be deducted in the tax year paid as opposed to the year of medical services, so this provision 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 deems the medical bills “paid” at the time of the recording of the transaction on the credit card. Thus, the whole amount can then be claimed during that year, since now you owe the credit company and not the medical provider. Of course, the additional problem is that you now have the medical expenses sitting on a charge card and 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.

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

If you found this article helpful, be sure to check back for our next article on which medical expenses should be included in your tax preparation and which should not.

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