News & Articles

Medical Costs: Can I Really Get a Tax Break for That?

Posted on Mon, Apr 22, 2019

It's difficult for many people to write off medical expenses because of the limits imposed under the tax laws. But you may qualify by including every expense allowed. Some of the qualified procedures may surprise you.

ELIGIBLE

NOT ELIGIBLE

A weight-loss program undertaken at a physician's direction to treat obesity or a condition such as heart disease. A weight-loss program to maintain your appearance. Meal replacements, diet foods and supplements that are substitutes for the food that you would normally consume.
Treatment at a drug or alcohol clinic. Smoking-cessation program and prescribed drugs for nicotine withdrawal. Trips your doctor recommends to rest or improve your morale
Acupuncture Marriage counseling
Dentures, hearing aids and orthopedic shoes. Household help, even if recommended by a doctor.
Admission and transportation to a medical conference if the conference concerns the chronic illness of you, your spouse, or a dependent. (Meals and lodging aren't deductible.) The collection and storage of DNA, unless you can show how DNA will be used for diagnostic testing. 
Lamaze classes for a mother-to-be. Maternity clothes.
Teeth cleaning and orthodontia Teeth bleaching and toothpaste
A wig purchased on physician's advice for the mental health of a patient bald from disease. Hair transplants
Contact lenses and peripheral materials as saline solution and enzyme cleaner. Retin-A for wrinkles
Nursing services at home or a care facility, including giving medication, changing dressings, bathing and grooming. Nursing services for a normal, healthy baby. (But you might be able to take a credit for child-care expenses.)

For example, most insurance plans won't cover laser eye surgery, such as radial keratotomy or "Lasik," because they consider it a cosmetic procedure. But it generally qualifies for a medical deduction and as an expense in a flexible spending account. (The IRS used to disallow Lasik as a deductible medical expense.) With the cost running into the thousands in most parts of the country, it's a considerable outlay. 

As with most tax laws, the medical rules can be tricky. You can't deduct over-the-counter vitamins but the U.S. Tax Court has ruled that medically prescribed vitamins to treat a specific condition are allowed.

There are also many exceptions to the general laws. For instance, you can't write off the cost of unnecessary cosmetic surgery to improve your appearance. That generally means no face lifts, electrolysis or liposuction. But you can deduct cosmetic surgery that's needed to improve a deformity directly related to a congenital abnormality, an injury from an accident, or a disfiguring disease.

A list of some other expenses that are eligible or ineligible for tax breaks appears in the right-hand chart. Here's a rundown of the basic rules:

Flexible spending accounts (FSAs). These tax-advantaged accounts generally have a "use-it-or-lose-it" feature on money left at the end of the year. So plan to empty your account by buying eyeglasses, filling prescriptions, getting a dental checkup or spending money on the eligible items listed in the chart. Note: Some FSAs allow participants an extra two-and-a-half-month grace period to use up the money in accounts if the employer properly amends its plan.

 

Medical deduction. Medical and dental expenses that are not reimbursed by insurance are deductible to the extent your annual total exceeds 10% of your adjusted gross income in 2019 (up from 7.5% in 2018). This can be a difficult threshold for many taxpayers to meet. To qualify for medical deductions, you must also itemize. 

When adding up your medical costs, don't forget the cost of traveling to your doctor or medical facility for treatment. If you go by car, you can deduct a flat rate, adjusted by the IRS each year, or you can keep track of your actual out-of-pocket expenses for gas, oil and repairs. 

With either the actual costs or the cents-per-mile method, you can add in the amounts paid for parking and tolls. If you must travel out of town for medical treatment, you may also qualify to write off some of the cost.

Each year, take a look at your medical expenses. If you are close to — or exceed the threshold — you may want to get as many expenses as possible into this year. Otherwise, you may as well postpone elective expenses until next year when you have another shot at a deduction.

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Tags: FSA, Tax Break, Medical

Year-End Reminder: Don't Forget FSAs

Posted on Wed, Nov 30, 2016
The holidays can be a joyous — but hectic — time of year. While you're juggling shopping for gifts, decorating your home and planning get-togethers with friends and family, it's easy to forget to spend any remaining funds in your Flexible Spending Accounts (FSAs) before New Year's Day. However, if you fail to observe the "use-it-or-lose-it rule," you could forfeit any money left over in your accounts, unless a special provision applies.

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Tags: Health FSAs, Year-End, Year-End Planning, Child and Dependent Care Credit, FSA

How to Make the Most of Medical Expense Deductions

Posted on Mon, Oct 10, 2016

With the ever-increasing cost of health insurance and medical care, you should be vigilant in finding ways to claim tax breaks related to health care. Unfortunately, that's now harder than before because a change included in the Affordable Care Act (ACA) increased the income-based threshold for deducting itemized medical expenses.

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Tags: Health Flexible Savings Account, Health Insurance, FSA, HSA

Making the Most of a Flexible Spending Arrangement

Posted on Sat, Nov 01, 2014

A health care flexible spending account (FSA) is an attractive fringe benefit for employees. Typically, a participating employee allocates part of his or her salary to a special account that is used to pay for qualified health care expenses. The employee chooses which expenses to pay during the year and saves tax on the deal because the contributions are not subject to income or payroll taxes.

Favorable IRS Rules

In a welcome move for employers and employees, the IRS relaxed the rules involved in tax-saving flexible spending accounts. Employees are able to get an extra 2 1/2 months after year-end to spend the money set aside in their accounts before they lose it. (IRS Notice 2005-42) In order to take advantage of the grace period, however, employers must amend FSA plans by December 31 to permit the extra 2 1/2 months -- through March 15 of the following year (this assumes the FSA plan operates on a calendar-year, which is generally the case). Employees can use unspent year-end balances to reimburse themselves for qualified expenses incurred within the grace period.

As an alternative to the 2 1/2 month grace period rule, your employer can amend its healthcare FSA plan to allow you to carry over up to $500 of any unused balance from the current year to the following year. (Health care FSA plans can offer either the grace period rule or the $500 carryover privilege, but not both.) The $500 carryover privilege is only allowed for health care FSAs (not dependent-care FSAs).

Essential to understand: The use-it-or-lose-it rule still exists, but the grace period and the $500 carryover rules allow employees more time to use FSA balances.


In addition to health care expenses, an FSA can also be established for dependent care expenses up to an annual limit of $5,000 per employee.

Here's how an employer-sponsored FSA works: You make an annual election to contribute a designated amount of your salary to a personal FSA. Contributions to fund the FSA are withheld from your paychecks. Then, you use the FSA dollars to reimburse yourself for uninsured medical expenses (insurance deductibles, co-payments, dental care, prescriptions and vision care, etc.).

Pre-Tax Dollars

The total amount withheld from your paychecks for the year is treated as a salary reduction for federal income tax, Social Security, and Medicare purposes (usually for state income tax purposes too). FSA reimbursements for qualified medical expenses are tax-free to you.

This arrangement allows you to pay out-of-pocket medical costs with pretax dollars. In effect, that's the same as getting an income tax deduction with the added attraction of cutting your Social Security and Medicare tax bills. The tax savings can really add up (the worksheet below can show you how).

What's more, because an FSA reduces adjusted gross income, it may make you eligible for other valuable tax benefits. However, unless an employer takes certain steps to amend its plan, any amounts contributed to the account and not spent by the end of the year are forfeited to the employer (see the right-hand box for more information.)

Similarly, FSAs can be valuable to employers, since they can be used to attract and retain top-flight talent. The contributions are not subject to payroll taxes and the savings from the employer's portion of payroll taxes are generally enough to cover the administrative costs.

Limits and Additional Details

For companies with FSAs, enrollment is generally only open to employees once a year. On the application form, you designate how much to deduct from your paycheck and deposit into the account.

If you don't enroll in your employer's FSA plan, you can't collect any tax savings. These savings are not just a timing difference -- they are permanent. However, there are limits. For 2014, the maximum amount you can contribute to a health care FSA is limited to $2,500.

Reminder: Due to the "use it or lose it" feature of FSAs, check to see if your employer has amended your organization's plan to offer the 2 1/2 month grace period or the $500 carryover privilege. If not, at the end of the year, make sure you use up all funds by making routine dental visits, scheduling elective procedures and refilling prescriptions.


WORKSHEET

To Estimate FSA Tax Savings

Use this worksheet to estimate the amount of taxes you could save by participating in an FSA plan. Note: The savings estimated are permanent, not just a deferral of taxes.

1. Enter the amount you would contribute annually to a health care FSA. For 2014, there is a health care FSA contribution limit of $2,500. $_______
2. Enter the amount you would contribute annually to a dependent care FSA. The maximum that can be contributed is $5,000 for each year. (If you are married, that amount represents the combined limit for both you and your spouse). $_______
3. Enter as a decimal your expected marginal federal tax rate

________

4. If FSA contributions are treated as salary reductions under your state's income tax rules, enter as a decimal your expected marginal state tax rate. (Otherwise, enter zero on this line.)

________

5. Enter as a decimal the marginal rate for Social Security and Medicare taxes on your salary. For 2014, the withholding rate for these taxes is 7.65 percent of salary up to $117,000. ___________
6. Your estimated tax savings from contributing to the FSA would be: (Line 1 plus Line 2) times (Line 3 plus Line 4 plus Line 5) $_______
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Tags: Healthcare, EHTC Article, Expenses, Newsletter, Articles, FSA, fringe benefit, Flexible Spending Account, Employees