How To Maximize Your Health Care Deductions
You cant control when you need health care. However, you can bunch up procedures to maximize deductions.
Say you have a handful of nagging health issues. Theyre not life-threatening, but theyre affecting your quality of life. You could decide one year to get all of those pesky problems fixed, reach the tax deductible threshold and apply for a deduction at tax time.
One last piece of advice — you don’t need to attach receipts to your 1040, but it’s a good idea to keep them for three years after filing your return just in case the IRS audits you.
What Medical Expenses Are Tax
Health insurance premiums aren’t the only medical costs that may be tax-deductible. If you itemize deductions, you can also deduct qualified medical expenses for yourself, your spouse and your dependents. Deductible medical expenses include payments for:
- Medical practitioners including doctors, dentists, chiropractors, psychiatrists and psychologists
- Inpatient hospital care
- Residential nursing home care, if the person is in the nursing home primarily for medical care. If that’s not the main reason the person is in a nursing home, you can only deduct the costs for medical care, not meals and lodging.
- Acupuncture treatments
- Inpatient treatment for alcohol or drug addiction
- Participation in a stop-smoking program and for prescription drugs to ease nicotine withdrawal
- Weight-loss programs for diseases diagnosed by a doctor, including obesity
- Prescription drugs and insulin
- Admission and transportation to a medical conference related to your, your spouse’s or your dependent’s chronic illness
- False teeth, reading or prescription eyeglasses, contact lenses, hearing aids, crutches and wheelchairs
- A service animal to assist a person with physical disabilities
- Transportation to medical care that qualifies as a medical expense, such as taxi, bus or train fare ambulance costs the out-of-pocket cost of using your personal car and tolls or parking fees
- Dental treatments and preventative dental care
Tax Credits Vs Tax Deductions Explained
- Tax credits directly decrease the amount of tax a small business owes by a dollar-for-dollar amount. For example, a $200 tax credit will decrease a businesss tax bill by $200.
- Tax deductions dont have as much of a direct impact on a filers tax liability as tax credits. Instead, they lower your taxable income, and how much money you save depends on your tax rate.
- While a tax credit gives the same benefit to all businesses that can claim the full amount, how much a business benefits from a tax deduction depends on the businesss tax liability and marginal tax rate. Businesses in higher tax brackets benefit the most.
- Tax credits usually cant decrease a businesss tax liability less than zero however, there are some exceptions in which the business can receive funds back. Deductions cant make taxable income lower than zero.
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What Is The Medical Expense Tax Credit
The Medical Expense Tax Credit can give you some financial assistance if you have paid for medical services out of pocket. Premiums paid for private health insurance plans are often eligible for deduction by the Canada Revenue Agency, but does that also apply to the self-employed?
Premiums paid to private health plans can be deducted from your business income, but you must be the sole proprietor of your business, and it must be your primary source of income.
To figure out which expenses count for deduction, visit the Tax Planning Guide website, which lists them along with what you cannot claim. Canada Revenue Agencys website gives an even more detailed list.
Premiums As Part Of Overall Medical Expenses
Even if you are not self-employed, the Internal Revenue Service allows you to count medical and dental insurance premiums as part of the 7.5% of your adjusted gross income that has to be spent on health care before any out-of-pocket medical expenses can be deducted.
The deductibility threshold for medical expenses was briefly set at 10%, rather than 7.5%, from 2013 through 2016. But Congress reduced the threshold back to 7.5% as of 2017, and the Consolidated Appropriations Act, 2021, sets that as the permanent threshold.
A long list of health-related expenses can be included in your total medical expenses, including prescription medications and optional surgical procedures, like laser eye surgery to correct vision. The IRS has a list on its website.
Keep track of the out-of-pocket expenses you incur during the yearincluding health insurance premiums if you’re buying your own plan but are not self-employed . If your total costs exceed 7.5% of your AGI, you’ll be able to deduct the costs above that threshold, assuming you opt to itemize your deductionsmore on that in a moment.
So for example, if your AGI is $50,000 in 2021 and you spend $8,000 on medical costs, including health insurance premiums that you pay yourself and aren’t otherwise eligible to deduct, you’d be able to deduct $4,250 worth of medical expenses on your tax return .
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Deductions For Qualified Unreimbursed Healthcare Expenses
However, you may be able to deduct some of your premiums if you purchase health insurance on your own using after-tax dollars. For the 2020 and 2021 tax year, youre allowed to deduct any qualified unreimbursed healthcare expenses you paid for yourself, your spouse, or your dependentsbut only if they exceed 7.5% of your adjusted gross income .
AGI is a modification of your gross income. It includes all your sources of incomewages, dividends, spousal support, capital gains, interest income, royalties, rental income, and retirement distributionsminus any number of allowable deductions from your income, including retirement plan contributions, student loan interest payments, losses incurred from the sale or exchange of property, early-withdrawal penalties levied by financial institutions, among others.
This is a lower amount than in 2019, in which any healthcare costs that were greater than 10% of AGI were eligible for the deduction. In 2017 and 2018, the cutoff was also 7.5%.
Expenses that qualify for this deduction include premiums paid for a health insurance policy, as well as any out-of-pocket expenses for things like doctor visits, surgeries, dental care, vision care, and mental healthcare. However, you can deduct only the expenses that exceed 7.5% of your AGI.
Deducting Premiums Paid For A Private Health Insurance Plan
While the Medical Expense Tax Credit can significantly reduce your taxes, it is not always obvious which medical expenses are eligible. Payments of premiums for private health service plans may qualify if they meet certain criteria, while others are excluded. It is important to know if any of your payments are eligible towards this credit.
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I’m Retired Can I Deduct Health Insurance Premiums
You can deduct your health insurance premiums on your return if you paid for the premiums with after tax dollars. Medicalexpenses are an itemized deduction on Schedule A and are deductible to theextent they exceed 10% of your adjusted gross income . Please clickhere for more information:
% Of Americans Overlook Taxes As A Retirement Expense
Its essential to understand how your retirement income and savings will be taxed, so you know how much you will have leftover. This information can help you make a financial retirement plan.
When it comes to taxes, most Americans overlook taxes as a significant retirement expense. In fact, less than 6 percent of Americans reported that they consider taxes as an important factor when planning for retirement.
Although the current Medicare tax rate is only 1.45 percent of an employees salary, that will amount to thousands of dollars over someones lifetime. Travel, food and transportation will also add up to a large sum of money over time.
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Examples Of Tax Deductible Fringe Benefits
Fringe benefits are excellent ways that corporations can use to attract talent, provide security for its employees, and also enjoy the value that they receive by being able to deduct the costs of many of these benefits. Forms of tax-deductible fringe benefits that C corporations can offer their shareholders and employees include:
In many of these cases, the companys contribution to the plan is tax-deductible and is not included in the employees taxable income. However, in the case of Group Term Life Insurance only up to $50,000 can currently be deducted by the company and be considered non-taxable income for the employee. Payments received through disability insurance are treated as taxable income.
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Public Safety Officers’ Annuity Deduction
The second deduction affects public safety officers, whether they were federal employees or not. The tax benefit to these workers was included in the Pension Protection Act of 2006. Under the PPA, these retirees may choose to have up to $3,000 per year deducted from their annuities to be paid directly to health insurers or long-term care insurers as premiums. Although the PSO retirees must report the benefit on their tax forms, the effect of the law is to exclude the entire $3,000 from their taxable incomes, but still enable them to deduct other medical expenses under the same rules as other taxpayers.
How To Claim Small Business Tax Credits
To take a general business credit, fill out the appropriate credit form provided by the IRS for business credits applicable to your current year. You will likely need to also fill out Form 3800. Any accumulation of business credits from earlier years coupled with any current business credits will create your current years worth of general business credit.
Speak with your accountant or tax preparer about which tax credits your small business may qualify for and the requirements to claim the credits.
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Turning 65 And Retiring: Consider Medicare And Other Options
When you get close to age 65, spend some time reviewing and considering all your Medicare options. When you do become eligible at age 65, you’ll want to remember to sign up during your 7-month initial enrollment period that begins 3 months before the month you turn 65.
There’s a lot to learn about the world of Medicare. You’ll need to know about Medicare Parts A, B, and D, as well as Medicare Advantage and “Medigap” supplemental insurance plans.
- Part A covers hospital costs after you meet a deductible.
- Part B is optional coverage for medical expenses and requires an annual premium. Part D is for prescription drug coverage.
- Medicare Advantage plans are all-in-one managed care plans that provide the services covered under Part A and Part B of Medicare and may also cover other services that are not covered under Parts A and B, including Part D prescription drug coverage.
- Supplemental policies, referred to as Medigap policies, are offered by private insurance companies to supplement expenses that Medicare Parts A and B do not typically cover.
Tip: You may be better off paying a higher premium but not having to pay out-of-pocket at your office visits. Look at the cost of annual premiums and co-pays at different levels of supplemental insurance. Compare these costs. Then factor in the number of visits and co-pay/co-insurance per visit that you anticipate for the next year.
Other Costs That You Could Deduct
There are a few medical costs that are tax-deductible but not covered by a health insurance plan. For instance, you can deduct your contact lenses, dentures, prosthetic lips, or extra pair of glasses.
And if you need to undergo laser vision corrective surgery, you can also deduct it.
You can also deduct the cost of home improvements if they are done to accommodate a physical illness or disability.
These improvements can be installing ramps, entrances, wheelchair lifts, and railings. However, installing an elevator isnt necessarily tax-deductible as it adds value to the house even if it is useful for those with a disability.
Although there are medical costs that are not part of your health insurance but are still deductible, there are medical costs that you cant deduct.
For instance, if you need to buy medical drugs that your doctor didnt prescribe, the cost of those drugs isnt tax-deductible. Furthermore, cosmetic treatments cant be deducted.
Read: What is Indemnity Insurance?
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What Is A Qualified Medical Expense
The IRS considers medical expenses the costs of diagnosis, cure, mitigation, treatment or prevention of disease and for the purpose of affecting any part or function of the body.
Expenses include payments for legal medical services by:
Medical expenses that can be eligible include costs for:
- Diagnostic devices
Medical care expenses must be primarily to alleviate or prevent a physical or mental disability or illness. They don’t include expenses that are merely beneficial to general health, such as vitamins or a vacation, according to the IRS.
Medical expenses can also include:
- Health insurance costs
- Pay for transportation to get medical care
- Long-term care costs
Are There Medical Costs I Cannot Deduct
There are many procedures and services that you cannot deduct from your taxes. The most common exclusions are non-prescription, over-the-counter drugs, and costs of treatments that are more cosmetic in nature, like teeth whitening. You might be able to deduct the cost of dietary supplements if they’re recommended by a doctor for a specific condition, but this is rare.
You can’t deduct the costs of toiletries or elective procedures that are not needed to improve your health. Nor can you deduct your monthly gym membership fee, even if your doctor told you to get more exercise.
Any costs that are reimbursed, or paid for by your insurance, cannot be deducted on your taxes. This makes sense because after all is said and done, some other party paid for them. Health insurance premium payments made via an employer-sponsored health plan are not deductible either, because those payments are made with pre-tax income.
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What Is The Standard Deduction For 2021
For single filers and married individuals filing separately, the standard deduction in 2021 returns climbs to $12,550, a $150 increase. The following year, the deduction increases to $12,950, a $400 increase. The income levels applying to each tax bracket are increasing up and down the income scale. 1
Social Security Tax Exemption
Social Security earnings are often exempt from federal income taxes. If you file as an individual and your Social Security and other earnings total less than $25,000 per year, you may not have to pay federal income taxes. If your Social Security and other earnings are between $25,000 and $34,000, you only have to pay income tax on 50 percent of your benefits.
For married people filing jointly, the threshold for paying any taxes on Social Security benefits is $32,000. If you jointly earn between $32,000 and $44,000, you only have to pay taxes on 50 percent of your benefits. For individuals or couples who exceed the 50 percent earning threshold, 85 percent of benefits become taxable,
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If You Choose An Imrf
If you enroll in an IMRF-endorsed plan after retirement, or participate in the Sav-Rx Prescription Drug Discount Card Program, Delta Dental plan, or the United Healthcare Vision Care plan, you can choose to have your insurance premiums deducted directly from your monthly benefit payments.
To request automatic premium deduction, please complete a “Health Care Program Premium Deduction Authorization for IMRF Endorsed Plans,” form and return it to Doyle Rowe LTD with your enrollment form.
Automatic premium deduction is available on all Doyle Rowe plans except for:
- Blue Cross and Blue Shield plan for retirees and family members under the age of 65
- Medicare Part D plan participants
Medicare Part D premiums cannot be deducted from your IMRF benefit payment, but you can elect to have them deducted from your Social Security payment.
Are Health Insurance Premiums Deductible On Federal Taxes
Health insurance premiums are deductible on federal taxes, as these monthly payments for coverage are classified as a medical expense. The general rule is that if you pay for medical insurance with out-of-pocket money, then you would be allowed to deduct the amount from your taxes.
For example, you would be able to take a tax deduction if you bought a federal marketplace health insurance plan and did not receive premium subsidies. Since the premiums for this Obamacare policy would be paid out-of-pocket, you could deduct the expenses while filing your taxes. If you did receive premium subsidies, then only the portion that you pay yourself would be allowed to be deducted. Below, we have identified some of the typical sources where you may get your health insurance from and if there are tax deductions available.
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How Much Is Needed For Health Care Costs In Retirement
According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple age 65 in 2021 may need approximately $300,000 saved to cover health care expenses in retirement.
Of course, the amount youll need will depend on when and where you retire, how healthy you are, and how long you live. The amount you need will also depend on which accounts you use to pay for health caree.g., 401, HSA, IRA, or taxable accounts your tax rates in retirement and potentially even your gross income.2
Tip: If you’re still working and your employer offers an HSA-eligible health plan, consider enrolling and contributing to a health savings account . An HSA can help you save tax-efficiently for health care costs in retirement. You can save pretax dollars , which have the potential to grow and be withdrawn tax-free for federal and state tax purposes if used for qualified medical expenses.3
Read Viewpoints on Fidelity.com: 5 ways HSAs can fortify your retirement