As the deadline for filing tax returns comes near, all the employers as well as employees have started making their preparations. The basic information and data that needs to be collected mainly includes the previous year’s deductible expenses including medical costs.
Majority of individuals include the medical expenses in the deductions as it lowers the tax amount considerably and at the same time helps cover medical costs. But not many of the employees are completely aware of the governing rules of medical expense deduction.
Medical Expense Deduction Computation:
Medical expenses include the costs associated with the diagnosis, treatments, cure, or prevention from any disease that has been recognized by the medical community and the costs for treating any problem that affects any area or functioning of any body part. Qualified medical deductions are the paid expenses for individual, spouse or dependent during the previous year.
For calculating deductions, you can only deduct those expenses that are above 10% of your adjusted gross income (AGI). This is also called “AGI floor”. For example, if your AGI is $45,000, then you will be allowed to make deductions if your medical expenses exceed $4500 (10% of AGI). So, if your total medical expenses cost $5500, then you would be able to deduct $1000 from your taxes, whereas if your medical expenses cost $2000, then would not be able to deduct any amount from your tax.
Until this year, the tax payers above 65 years are exempted and allowed to deduct the medical expenses exceeding 7.5% of their AGI. But this exemption will expire on December 31, 2016 and after that every individual irrespective of age or gender will be allowed to deduct expenses exceeding 10% of AGI.
Medical Expenses Deduction Rules:
IRS has given clear instructions for qualified medical expenses. Only a certain ones can be deducted from the tax. There’s a quite comprehensive list of qualified deductible expenses.
- Preventive Care & Therapy, Insurance premiums and prevention drugs are deductible.
- Expenses do not only include the treatment of diseases, injuries or medical emergencies, travel costs for treatment can also be included in total expenses. Travel costs include ambulance service, toll and parking fees, public transportation costs as well as cost of using personal vehicle.
- Itemized deductions are preferable as they help IRS better verify the deductions for considerate medical expenditure.
- If you paid for the expenses with your Health Savings Account (HSA) or Flexible Spending Arrangements (FSA), then no deductions are allowed as HSA & FSA are already exempted from taxation.
- Only the previous year’s expenses can be included in the deductions.
- In most deductions, the medical expenses need to be itemized and declared in Schedule A of the form, which is subsequently attached with employee’s 1040 tax return and sent to the IRS.
Dovetailing the above, managing medical expenses and deducting them from the taxes is undoubtedly a painful task for everyone. Thus, you must seek an expert assistance from the professionals in order to handle the taxes and benefits efficiently as well as stay up with the necessary IRS deadlines and provisions.