Medical and Dental Expenses
Medical expenses are the first itemized deduction on Schedule A. Taxpayers are allowed a deduction for the medical expenses paid for themselves, their spouses, and dependents. Congress decided, however, that a certain portion of medical expenses is personal in nature and should not be deductible; therefore, limitations have been established on the amount that may be deducted. The formula for calculating a taxpayer’s medical expense deduction is as follows:
| Prescription medicines and drugs, doctors, dentists, hospitals, medical insurance premiums | $xxx |
| Other medical and dental expenses, such as lodging, transportation, eyeglasses, contact lenses, etc. | $xxx |
| Less: Insurance reimbursements | ($xxx) |
| Subtotal | $xxx |
| Less: 7.5% of adjusted gross income | ($xxx) |
| Excess expenses qualifying for the medical deduction | $xxx |
Expenses that are deductible as medical expenses include the cost of items for the diagnosis, cure, mitigation, treatment, and prevention of disease. Also included are expenditures incurred that affect any structure or function of the body. See Publication 17 for a comprehensive checklist of expenses that can and cannot be deducted.
Prescription medicines, drugs, and insulin are the only drugs deductible as medical expenses. No deduction is allowed for drugs purchased illegally from abroad, including Canada and Mexico. Nonprescription medicines such as over-the-counter antacids, allergy medications, and pain relievers, even if recommended by a physician, are not deductible as a medical expense. Nonprescription drugs may be excludable from income under certain employer reimbursement plans, however. Although laws in California, Arizona, and some other states legalize marijuana for medical use in some instances, the IRS has ruled that taxpayers cannot deduct the cost of marijuana as a medical expense.
Medical insurance includes standard health policies, whether the benefits are paid to the taxpayer or to the provider of the services. In addition, the premiums paid for membership in health maintenance plans are deductible as medical insurance, as are supplemental payments for optional Medicare coverage. Premiums paid for qualified long-term care insurance policies are also deductible medical expenses up to specified limits that change each year and are based on the age of the taxpayer. The amounts in 2008 range from $310 per year for a 40-year-old to $3,850 a year for a person age 71 and over. Insurance policies that pay a specific amount each day or week the taxpayer is hospitalized are not considered medical insurance and the premiums are not deductible.
Self-employed taxpayers are allowed a deduction in arriving at AGI equal to 100% of the medical insurance premiums paid for themselves and their families (see Chapter 4, Adjustments to Income). Long-term care insurance premiums, up to a specified amount, and Medicare premiums are considered health insurance for this purpose. If a deduction is taken for these items in arriving at AGI, then these same expenses are excluded from the medical expense deduction on Schedule A.
Payments for special equipment or improvements (“capital items”) purchased and installed in the taxpayer’s home for medical reasons may also be deductible. Allowable amounts are deducted fully in the year the item is purchased; the cost of the item does not have to be depreciated. If the expenditure is for an improvement that increases the value of the taxpayer’s property, the deduction is limited to the amount by which the expenditure exceeds the increase in the value of the property. If the value of the property does not increase as a result of the expenditure, the entire cost is deductible. The cost of upkeep and operation of an item, the cost of which qualified as a medical expense, is also deductible, provided the medical reason for the improvement or special equipment still exists.
Example
A taxpayer has a heart condition and installs, based on a physician’s advice, an elevator in his home at a cost of $7,200. According to a real estate appraiser, the value of the home increased by $3,000 as a result of the improvement. Insurance paid $2,500. The taxpayer is allowed a deduction of $1,700 ($7,200 – $3,000 – $2,500).
Go to Publication 17 and read Chapter 21: Medical and Dental Expenses.
Questions and Problems
The cost of which of the following expenses is not deductible as a medical expense on Schedule A, before the 7.5% of AGI limitation?
Dentures
Birth control prescriptions
Marriage counseling
A psychiatrist
The cost of which of the following is deductible as a medical expense?
Travel to a warm climate
Birth control pills
A disability insurance policy that pays $200 for each day the taxpayer is in the hospital
Liposuction to reduce waist size
Karen installed a special pool for the hydrotherapeutic treatment of severe arthritis, as prescribed by her doctor. The cost of installing the pool was $21,500, and her insurance company paid $4,000 toward its cost. The pool increased the value of Karen’s house by $6,000, and it has a useful life of ten years. How much of a deduction is Karen entitled to in the year of installation of the pool? $__________
In 2008, Kate and Jim are married taxpayers who file a joint tax return with an AGl of $48,000. During the year, they incurred the following expenses:
| Item | Amount ($) |
|---|---|
| Hospitalization insurance premiums | 1,200 |
| Premiums on an insurance policy that pays $100 per day for each day Kate is hospitalized | 400 |
| Medical care lodging (two people, one night) | 155 |
| Hospital bills | 3,200 |
| Doctor bills | 1,850 |
| Dentist bills | 275 |
| Prescription drugs and medicines | 320 |
| Psychiatric care | 800 |
| Total | 8,200 |
In addition, during March they drove eight hundred miles for medical transportation, and their insurance company reimbursed them $2,100 for the above expenses. Use Schedule A and complete the Medical and Dental Expenses section for Kate and Jim. The amount they can deduct is $__________.
