Health Care Tax Deduction: What You Need to Know
Understand how health care tax deductions work, which expenses qualify, and how to maximize potential savings while staying compliant with IRS rules.
Medical costs can add up quickly, but tax deductions may help reduce the financial burden. The IRS allows certain healthcare expenses to be deducted, potentially lowering taxable income. However, not all expenses qualify, and specific rules must be met.
Understanding what qualifies and how to properly claim these deductions is essential for maximizing potential savings.
Eligible Expenses
The IRS has strict guidelines on deductible medical costs. Generally, expenses must be primarily for the diagnosis, treatment, mitigation, or prevention of disease. This includes payments to doctors, dentists, surgeons, and other licensed medical professionals, as well as hospital care, prescription medications, and necessary medical equipment.
Some lesser-known expenses also qualify. Prescription drugs, including insulin, are deductible, but over-the-counter medications are not unless prescribed by a doctor. Medical aids such as wheelchairs, crutches, and hearing aids are eligible, as are home modifications like installing ramps or widening doorways if medically necessary. Transportation costs related to medical care, including mileage for driving to appointments, public transit fares, and ambulance services, can also be deducted.
Long-term care services and insurance premiums for qualified long-term care policies may be included, but only up to IRS-defined limits based on age. Some alternative treatments, such as acupuncture, may be deductible if prescribed by a licensed professional. However, purely cosmetic procedures, such as elective plastic surgery, do not qualify unless necessary to correct a deformity or injury.
Deduction Requirements
To claim a deduction, medical expenses must exceed a specific threshold relative to adjusted gross income (AGI). For the 2024 tax year, only costs surpassing 7.5% of AGI can be deducted. For example, if an individual has an AGI of $50,000, only medical expenses exceeding $3,750 can be included. This threshold often makes it difficult for those with lower healthcare costs to benefit unless they have significant expenses.
Deductions must be itemized on Schedule A of Form 1040, meaning taxpayers who take the standard deduction cannot claim them. The standard deduction for 2024 is $14,600 for single filers and $29,200 for married couples filing jointly. Itemizing is only beneficial if total deductions, including medical expenses, exceed these amounts. Those with substantial healthcare costs, particularly due to chronic conditions or major procedures, are more likely to benefit.
Only expenses paid during the tax year are deductible, regardless of when the medical service was provided. For example, if a bill is incurred in December 2023 but paid in January 2024, it must be claimed on the 2024 return. Additionally, expenses reimbursed by insurance or paid through tax-advantaged accounts like Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs) cannot be deducted.
Special Considerations for Self-Employed
Self-employed individuals have additional opportunities to deduct healthcare costs, particularly through the self-employed health insurance deduction. Unlike regular medical expense deductions, which require itemization and must exceed a percentage of AGI, this deduction allows eligible self-employed individuals to deduct the full cost of their health insurance premiums directly from their taxable income. This includes coverage for themselves, their spouse, dependents, and children under 27, even if they are not listed as dependents.
To qualify, the business must generate a net profit, as the deduction cannot exceed self-employment income. If the business operates at a loss, the deduction cannot be taken for that year but may be claimed in future years if profitability improves. Additionally, self-employed individuals with access to an employer-sponsored health plan through another job or a spouse’s employer are not eligible to deduct their own insurance costs.
Unlike deductions that require itemization, this write-off is considered an “above-the-line” deduction, meaning it reduces taxable income before calculating AGI. This can lower the threshold for other deductions and reduce self-employment tax liability. Since self-employed individuals must pay both the employer and employee portions of Social Security and Medicare taxes, lowering taxable income can help reduce these obligations.
Tax-Favored Health Accounts
Certain tax-advantaged accounts help manage healthcare expenses while reducing taxable income. Health Savings Accounts (HSAs) offer triple tax benefits: contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses remain untaxed. These accounts are available to those enrolled in a high-deductible health plan (HDHP), with 2024 contribution limits set at $4,150 for individuals and $8,300 for families. Those aged 55 and older can contribute an additional $1,000. Unlike other healthcare accounts, funds roll over indefinitely, making HSAs a useful tool for long-term medical savings.
Flexible Spending Accounts (FSAs), offered through employers, also provide tax savings but with stricter rules. Contributions reduce taxable wages, lowering payroll taxes, but funds must generally be used within the plan year. Some employers offer a grace period or allow a carryover of up to $640 in 2024, but unused funds beyond these limits are forfeited. FSAs are particularly beneficial for predictable medical expenses, such as ongoing prescriptions or routine care, but require careful planning to avoid losing contributions.
Record-Keeping Necessities
Proper documentation is necessary to substantiate medical deductions in case of an IRS audit. Without detailed records, taxpayers risk losing deductions or facing penalties.
Receipts, invoices, and statements from medical providers should be retained, showing the date, amount paid, and nature of the service. Bank and credit card statements alone are not sufficient unless they clearly indicate the medical nature of the transaction. Taxpayers should also keep records of prescriptions, insurance premium payments, and any reimbursements received, as amounts covered by insurance cannot be deducted. For those deducting mileage for medical travel, a log detailing the date, purpose, and distance of each trip should be maintained.
Taxpayers should store these records for at least three years after filing, as the IRS typically has this window to audit returns. However, if medical deductions are substantial or involve complex claims, retaining documents for longer may be wise. Digital storage solutions can help preserve records and make retrieval easier if needed.