Is Over-the-Counter Medication a Qualified Medical Expense?

The General Rule for Over-the-Counter Medications

The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 expanded the definition of a qualified medical expense to include over-the-counter (OTC) medications. This means you can purchase these items without a doctor’s prescription and have them qualify for certain tax-advantaged health accounts.

This legislation reversed a previous rule that required a prescription for an OTC product to be a valid medical expense. The change applies to purchases made after December 31, 2019. Common remedies for pain, colds, and allergies are now treated similarly to prescription drugs when using specific health spending accounts.

Examples of Qualifying and Non-Qualifying Items

Items that now qualify as medical expenses without a prescription include a wide range of common remedies. These include:

• Pain relievers like aspirin and ibuprofen
• Cold and flu medicines
• Allergy and sinus products
• Medications for heartburn or indigestion
• First-aid supplies such as bandages and antiseptic wipes

Menstrual care products, including tampons and pads, are now qualified. Additionally, personal protective equipment (PPE) purchased for the primary purpose of preventing the spread of an infectious disease, such as masks, hand sanitizer, and sanitizing wipes, are considered qualified medical expenses.

Conversely, many items available in a pharmacy do not qualify because they are for general health or cosmetic purposes. This includes most vitamins and nutritional supplements intended for general wellness rather than treating a specific physician-diagnosed condition. Toiletries like toothpaste and soap, along with cosmetics, are also not considered qualified medical expenses.

Using Tax-Advantaged Accounts for OTC Purchases

For those with a Health Savings Account (HSA), Flexible Spending Arrangement (FSA), or Health Reimbursement Arrangement (HRA), purchasing qualified OTC items is a straightforward process. These accounts allow you to use pre-tax dollars, which lowers your taxable income and creates a direct saving on these purchases. You no longer need to get a prescription to use these funds for eligible OTC products.

The most common method for payment is using a debit card linked directly to your tax-advantaged account. Most major retailers have updated their point-of-sale systems to automatically identify eligible OTC items, allowing for a seamless transaction at the checkout counter.

If you pay for a qualified OTC item with personal funds, you can still use your account through reimbursement. This involves submitting a claim to your account administrator, accompanied by an itemized receipt as proof of the purchase. You should keep all receipts for OTC purchases made with these accounts, whether through a debit card or reimbursement, as the IRS may require them as documentation during an audit.

Claiming OTC Expenses as a Tax Deduction

Separate from using an HSA or FSA, you can deduct medical expenses paid out-of-pocket on your federal income tax return, but the rules are more stringent. To do this, you must choose to itemize your deductions on Schedule A (Form 1040) instead of taking the standard deduction. This is advantageous only if your total itemized deductions exceed the standard deduction amount for your filing status.

A primary hurdle is the 7.5% Adjusted Gross Income (AGI) threshold. You can only deduct the portion of your total qualified medical expenses that exceeds 7.5% of your AGI. This includes not just OTC items but also doctor visits, prescription drugs, and other health costs. For example, if your AGI is $60,000, the threshold is $4,500. If your total medical expenses for the year were $6,000, you could deduct $1,500.

For an OTC medicine to be deductible on Schedule A, it must be prescribed by a doctor, with insulin being an exception. This contrasts with the rule for HSAs and FSAs, where a prescription is not needed. Therefore, while many OTC items can be purchased with tax-advantaged accounts, only a small subset qualifies for the itemized medical expense deduction.