Handling IRS Medical Expense Deductions
As April 15 approaches, employees and companies alike are beginning to gather the necessary materials to file their tax returns. These preparations often include a review of deductible expenses that occurred during the previous year. On many tax returns, some of the most commonly deducted expenses are medical costs.
Many people elect to deduct medical expenses because it can lower the overall amount of tax that they owe, in addition to helping them defray the costs of medical treatments. As we get closer to tax season, you may find yourself or your employees wondering about the rules that govern medical expense deduction.
How to Calculate Medical Expense Deductions
The key figure to keep in mind when calculating medical expense tax deductions is Adjusted Gross Income, or AGI. Generally speaking, taxpayers are only allowed to deduct medical expenses that exceed 10% of their yearly AGI.
For example, if an employee earns $40,000 a year, they will only be able to make a deduction if their medical costs go over $4000. Furthermore, they will only be able to deduct the amount that exceeds the 10% figure – thus, if this employee incurred $5000 worth of medical costs, they would only be able to deduct $1000.
Deduction Rules to Remember
The IRS has very clear regulations for deducting medical expenses on a tax return.
Only certain medical expenses can be deducted.
However, the list of deductible medical expenses is quite comprehensive. As stipulated by the IRS, “Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body”.
Insurance premiums and prescription drugs are deductible.
Preventative care and therapy are deductible.
Qualifying medical expenses are not limited to treatment of injuries, illnesses, or emergencies.
Travel costs can be included in the overall total of medical expenses.
This includes “public transportation, ambulance service, tolls and parking fees”, as well as mileage incurred with your personal vehicle.
Deductions must be itemized.
This enables the IRS to verify that you are making deductions for legitimate healthcare costs.
You cannot deduct expenses that were paid for with funds from a Health Savings Account (HSA) or Flexible Spending Arrangements (FSA).
HSA and FSA funds are already exempt from taxation; thus, they cannot be deducted from your annual tax return.
Expenses can only be deducted for the year in which they were paid.
For instance, if you paid for a leg surgery in 2014, you would not be able to deduct it on your 2015 taxes.
As with most deductions, medical expenses must be declared and itemized on the Schedule A form. This form is subsequently attached to the employee’s 1040 tax return and sent to the IRS.
There is a special exemption for medical expense deductions that is set to expire this year – namely, that people aged 65 years or older are allowed to deduct medical expenses that exceed 7.5% of their income. This exemption expires on December 31, 2016. After this date, all taxpayers, regardless of age, will be limited to deducting medical expenses that exceed 10% of their AGI.
Your employees may have many different questions about how to handle their medical expense deductions – find an expert that is committed to making healthcare benefits easier for companies of all sizes.
Categorized in: ACA