Learn how to claim your medical expenses
Who can claim medical expense deductions?
The IRS allows medical deductions if you meet two criteria. The first hurdle is whether it makes sense to itemize deductions. So you need to figure out which is bigger: the standard deductible -- a figure established annually by the federal government -- or the sum total of allowable itemized deductions, including eligible medical expenses, taxes, interest, charitable contributions, casualty and miscellaneous expenses. If the standard deduction is larger than all of these itemized deductions, there is no reason to itemize. One strategy is to bunch up deductions like real estate taxes or charitable contributions into every other year so that your itemized deductions exceed the standard deduction. Remember, you can claim a deduction based on when you pay the bill, rather than its due date, so it may make sense to pay deductible taxes early.
What's the second hurdle?
Next, you need to overcome the 7.5 percent medical expense deduction floor. Only allowable medical expenses exceeding 7.5 percent of your adjusted gross income can be deducted. Your adjusted gross income is all of your wages minus allowable deductions. If you take a loan to pay expenses, the loan is deductible. Prepayments toward medical expenses are not deductible, except in rare cases. Cashing in part of your tax-deferred accounts for medical bills may allow you to avoid some portion of withdrawal penalties.
Which medical expenses are deductible?
In general, deductible medical expenses are the taxpayer's unreimbursed costs for the diagnosis, treatment or prevention of disease. Transportation that is essential to medical care as well as qualified long-term services and insurance premiums qualify.
For whom can you claim a medical expense?
Ahh, sweet relief. The IRS actually does something kindly by allowing you to claim not only expenses paid for your spouse and your tax dependents, but also expenses paid on behalf of a person whom you could have claimed as a dependent. For example, you are allowed to take medical expenses you paid on behalf of a parent, even if your parent files a tax return, provided all other dependency requirements are met. Domestic partners or others who live with you for the entire year also may qualify.
Any tips for planning for the coming year?
If you're not covered by a health-care plan, you might want to consider opening a Health Savings Account, an IRA-like account to pay medical expenses. The essence of an HSA account is that it provides tax benefits for those individuals who can't itemize and aren't covered by other health care.
See also: Peace of Mind - Ten steps to cope with the financial impact of cancer
This article was written in 2008. Since then, the topic has been addressed on our mCancerTalk blog: