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Small Business Employee Benefits and HR Blog

5 Tips for Medical Expense Tax Deductions in 2013

With the IRS tax filing deadline approaching, many filers will be asking their tax professionals about medical expense tax deductions for expenses incurred in 2013.

The following are five tips to help maximize your medical expense tax deductions.medical_tax_deductions

1. General Rules for Medical Expense Tax Deduction

Tax filers are able to deduct the amount of unreimbursed medical expenses in excess of 10% of Adjusted Gross Income (AGI). Previously, the law permitted deductions for unreimbursed expenses in excess of 7.5% of AGI.

To quickly calculate the minimum amount of medical expenses that you need to have incurred in order to qualify for the deduction, take your AGI and multiply it by 0.10.

Example: If your AGI was $60,000, [60,000*0.10 = $6,000]. Any expenses incurred beyond $6,000 would be considered tax-deductible medical expenses. 

Age 65 or Older? There is a temporary exemption for individuals age 65 and older until December 31, 2016. If you are 65 years or older, you may continue to deduct total medical expenses that exceed 7.5% of your AGI through 2016. If you are married and only one of you is age 65 or older, you may still deduct total medical expenses that exceed 7.5% of AGI. This exemption is temporary. Beginning January 1, 2017, the 10% threshold will apply to all taxpayers, including those over 65.

2. Whose Medical Expenses May be Deducted?

Medical expenses may be deducted for yourself, spouse, dependent, qualifying child, qualifying relative, and/or decedent. Medical expenses are deductible as long as the person was considered a spouse or dependent at the time services were performed or when payment was rendered. 

3. Medical Expenses That Qualify for Deduction

IRS Publication 502 provides guidance on the types of medical expenses that qualify for medical expense deduction. 

For each medical expense, you should keep a record of the name and address of each medical care provider you paid and the amount and date of each payment. You should also keep a statement or itemized invoice showing a description of the medical care received, who received the care, and the nature and purpose of the medical expenses.

4. Overlooked Expenses That Qualify for Medical Expense Deduction

  1. Travel expenses to and from medical treatments (see IRS standard mileage rates)

  2. Insurance payments from already-taxed income (includes long-term care insurance)

  3. Uninsured medical treatments (e.g. false teeth, contact lenses, etc.)

5. Medical Reimbursement Plans as Vehicles for Medical Expense Tax Deductions

Many business owners and employers set up a tax-advantaged medical reimbursement plan as a vehicle for medical expense tax deductions. There are different types of medical reimbursement plans, inlcuding:

  • Health Reimbursement Arrangement (HRA) - An HRA is an employer-funded plan that reimburses employees tax-free for HRA-qualified medical expenses. HRA reimbursement dollars received by an employee are not included as income and therefore do not affect their AGI. 

  • Healthcare Reimbursement Plan (HRP) - An HRP is an employer-funded, limited-purpose Section 105 Plan designed for premium reimbursement. An HRP can be used to reimburse qualified individual and family health insurance premiums. HRP reimbursement dollars received by an employee are not included as income and therefore do not affect their AGI

  • Health Savings Account (HSA) - An HSA is a financial account established by an individual to pay for qualified medical expenses tax-free. HSAs must be linked with a qualified high-deductible health insurance plan and anyone can contribute to it.

  • Flexible Spending Account (FSA) - An FSA is a tax-advantaged account that allows an employee to pay for future qualified medical expenses through payroll deduction.

Read more about these types of account-based health plans.

What are your tips for medical expense tax deductions in 2013? Leave a comment below.

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