Under normal circumstances, taxpayers can deduct medical costs that exceed 7.5% of their adjusted gross income (AGI), but there are some restrictions on this deduction. From 2013 until 2016, the requirement was set at 10 percent. After that, a flurry of federal legislation reduced it to 5 percent, then raised it to 10 percent, and then decreased it once again. Since then, the rate has remained constant at 5%. Through the end of 2020, the deduction was subject to a threshold of 7.5%, and you had to meet that threshold in order to claim it on your tax return in 2021. After that, in December of the year 2020, additional law came into effect, making the 7.5 percent requirement permanent. The deduction for medical expenses is now available, which is good news for taxpayers, but there are many restrictions on what kinds of expenses can be deducted and under what circumstances.
The Repercussions of Legislation at the Federal Level
It was originally planned for the bar for deductible medical expenses to stay at 10 percent in 2016, but the Tax Cuts and Jobs Act (TCJA) reduced the threshold to 7.5 percent for 2017 and 2018. If your medical expenses for those years exceeded 7.5 percent of your adjusted gross income (AGI), you were eligible for the deduction. The Taxpayer Certainty and Disaster Tax Relief Act of 2019, which was signed into law by former President Trump, stopped the medical expenditure deduction from going back up to 10 percent of a taxpayer's AGI beginning in January 2020. This was a change that had been scheduled to take place. Section 103 of Title I of this Act says that the number "7.5 percent" should be used instead of "10 percent" for all tax years that start before January 1, 2021. Therefore, we were back at 7.5 percent for the tax years 2019 and 2020, and then in December of 2020, the Omnibus Appropriations Law, which was signed by the then-current President Trump, made the 7.5 percent level permanent.Deductions That Are Permitted
The Internal Revenue Service (IRS) says that qualified medical expenses are costs related to "diagnosis, cure, mitigation, treatment, or prevention of a disease or condition that affects any part or function of the body." 3 In order for a medical expense to be deductible under the provisions of Internal Revenue Code section 213(d)(1), it must meet one of the following conditions:- Any and all medical services are provided by doctors, surgeons, dentists, and other medical professionals for the purpose of identifying, curing, mitigating, treating, or preventing disease.
- Any fees associated with purchasing drugs recommended by a medical professional.
- Any costs associated with medical devices, equipment, and supplies that have been recommended by a qualified medical expert, such as the purchase of eyeglasses.
- The treatment must have some kind of effect on the body's structure or function.
- Transportation costs to and from medical appointments are included in this category.
- The provision of long-term care services
Insurance for medical treatment or long-term care
Expenses that are merely beneficial to one's overall health, such as vitamins, are not covered. However, it is possible to deduct the cost of treatments and prescriptions provided by medical professionals such as doctors, surgeons, dentists, chiropractors, psychologists, psychiatrists, and other similar medical professionals. The Internal Revenue Service provides a free tool that can assist you in determining whether or not you are eligible to deduct your medical expenses.Expenses incurred while traveling for medical purposes
If you are unable to receive medical treatment locally, you may be able to deduct the cost of transportation to and from a healthcare facility from your taxes. When figuring out the total cost of transportation for medical reasons, the following costs can be added:- Prices for traveling by bus, cab, train, or plane
- Providers of ambulance services
Who Is Eligible to Get the Treatment?
You, your spouse, and any dependents you support are all eligible to have any medical costs that you pay for deducted from your taxes. It is also possible that you will be able to deduct expenses for a person who is not actually claimed as one of your dependents but who you would have been allowed to claim as such except for one of the following situations: Because of the regulations that apply to children of divorced or separated parents, you did not list your child as a dependent on your tax return. You were not able to claim an individual as a dependent on your tax return either because that individual had a gross income of greater than $4,300 as of 2021 or because they filed their return as a married couple. You did not list a certain individual as a dependent on your tax return because you knew that individual could be listed as a dependent on the return of another taxpayer. Even if the other parent of the child identifies them as a dependant, a taxpayer is still allowed to deduct medical expenses for their own children. In this circumstance, each parent is eligible to take a deduction for the portion of the child's medical costs that they personally paid for.The Deduction, as well as the AGI limit
The 7.5 percent rule can be calculated by first adding up all of your medical expenses for the year and then deducting an amount that is equal to 7.5 percent of your adjusted gross income from that total. For example, if your AGI is $65,000, the smallest contribution you can make is $4,875, or 7.5 percent of $65,000.Your adjusted gross income will be listed on line 11 of your Form 1040 for the year 2021. If you had $10,000 in qualified medical costs during the tax year, then your deduction would be $5,125, which is the difference between the threshold of $4,875 and the total amount of those expenses. You will not be able to claim the whole $10,000, which is certainly a bummer. Nevertheless, this is a significant improvement over the limitation of only being able to claim 10% back in 2016.You will need to itemize in order to qualify for the deduction
In order to deduct your medical expenses, you need to itemize your deductions. This indicates that you are required to fill out Schedule A and submit it together with your tax return. It may be worth your time if you are entitled to claim numerous different itemized deductions in addition to the standard deduction, and if the total of these deductions is greater than the standard deduction for the year. However, after the Tax Cuts and Jobs Act was passed, this may be a little bit of a stretch. You must choose between taking itemizing your deductions and standard deduction. You cannot do both. The Tax Cuts and Jobs Act (TCJA) roughly quadrupled the standard deductions for all taxpayers, and these deductions are now increased on an annual basis to account for inflation. They are as follows: Single taxpayers will pay $12,550 in 2021, while married taxpayers who file separate returns will pay $12,550. Filers who are considered to be heads of households will pay $18,800 in 2021. $55,100 in 2021 for taxpayers who are married and file their taxes jointly. If you don't take the standard deduction and don't have any itemized deductions that add up to more than the amount of the standard deduction that applies to your situation, you'll end up having to pay taxes on more of your income than you have to. If it turns out that itemizing your tax return is to your best advantage in 2021, you can deduct medical expenditures on line 1 of the 2021 Schedule A. To determine whether or not you are subject to a threshold limitation on medical expenses, complete lines 2 and 3 of Schedule A. In the end, line four will represent the portion of what you paid that is tax deductible.Pretax Expenses Aren't Deductible
In order to qualify for the deduction for medical expenses, the charges in question must be ones that aren't covered by your health insurance policy. Take, for instance, the case where you have a prescription medication that costs $50, of which your insurance company covers $20, and where you are responsible for paying the remaining $30 out of pocket as your copay. Because of the deduction for medical expenses, you can deduct only the $30 that came directly out of your own pocket. Also excluded from the itemized deduction for medical expenses are any costs associated with medical care that was paid for using funds from a health reimbursement plan, a health savings account (HSA), or a flexible spending account. You can't get two benefits out of the same tax break if you use these accounts because they already supply one.