What if I can't afford to pay my taxes?
The IRS will agree to work with you to set up a payment plan so the liability can be paid off with minimal hardship.
If you had a lot of medical expenses in 2020, you might be able to deduct them and lower your tax bill. However, you have to meet all the IRS requirements. Here’s a look at what to expect if you think you might qualify for the medical expense deduction.
Anyone who spent more than 7.5% of their AGI on qualified medical expenses in 2020 may deduct them on Schedule A. If you take the standard deduction, however, you won’t be able to deduct your medical expenses. Only filers who itemize deductions on Schedule A can use the medical expense deduction.
The Tax Cuts and Jobs Act of 2017 nearly doubled the standard deduction for 2018 and beyond. That’s good news for most people, but if you’re trying to squeeze extra tax savings from your health expenses, the bar is now a lot higher.
In 2020, if you’re filing single, your itemized deduction must exceed $12,400 (or $24,800 if you're filing jointly) in order to deduct your medical expenses. The standard deduction goes up very slightly in 2021 as shown in the table below:
The medical expense deduction is a “below-the-line” or itemized deduction. Above-the-line deductions affect your gross income. You don’t need to itemize your deductions to take above-the-line deductions.
Below-the-line deductions affect your adjusted gross income (AGI). The standard deduction is a below-the-line deduction, as is the medical expense deduction. Deductions lower your taxes by reducing your taxable income.
Tax credits, on the other hand, are subtracted directly from the amount of tax you owe.
How much you save on your taxes depends on your tax bracket and how much you deduct in medical expenses. For example, if you’re in the 24% tax bracket and you can deduct $5,000 in medical expenses, you’ll save $1,200 on your tax bill.
You can only deduct the portion of your medical expenses that exceed 7.5% of your AGI. To see if you qualify for the medical expense deduction, first, calculate your adjusted gross income.
AGI is essentially your total gross income, including employment earnings, alimony, capital gains, dividends, interest, and investment income, minus a few specific deductions for things like moving and education expenses, HSA and IRA deductions, and self-employment expenses.
There are several easy-to-use online AGI calculators if you want to skip the math. The AGI calculator at Omni Calculator is one of the better options.
Once you have your AGI, multiply it by 7.5% to determine your medical expense threshold. For example, if your AGI is $100,000 and you’re filing jointly, your medical expenses must be more than $7,500 to use the deduction.
Example: Mel and Tilly have AGI of $70,000 and qualifying medical expenses of $9,500. They can deduct $4,250 on Schedule A ($70,000 x 0.075 = $5,250; $9,500 - $5,250 = $4,250).
Remember, though; your other itemized deductions must be equal to or higher than the standard deduction before you can claim the medical expense deduction.
If you use a digital tax preparation service, you’ll just need to enter your medical and dental expenses, and the software takes care of the rest.
If you have to file an amended return or you choose to file a paper return for another reason, you’ll enter your medical and dental expenses on Form 1040 Schedule A. There’s a section near the top of the form where you’ll go through the AGI calculation above to determine your deduction. Once you complete the calculations, you’ll enter the deduction on line 4.
The IRS generally considers any medically necessary services and supplies to be tax-deductible for purposes of the medical expense deduction.
You can also claim certain medical insurance premiums if you pay them with taxable income. For example, Medicare and Medigap premiums and long-term care insurance premiums can be deducted.
The following list includes some common costs that qualify for the medical expense deduction. It’s not an exhaustive list, however, so if you don’t see your expense listed, check IRS Publication 502 on medical and dental expenses.
Most visits with a credentialed healthcare provider, including doctors, nurse practitioners, physical therapists, counselors, chiropractors, and some non-traditional health providers
Inpatient care in a hospital or long-term care facility
Family planning, including fertility treatments
Medical supplies and equipment such as crutches, blood sugar tests, bandages, and home oxygen
Transportation, including ambulance services and personal transportation to and from medical appointments
Vision care, including glasses and contact lenses
Hearing care, including hearing aids
Dental care, including dentures and implants
Special education costs
Assistive devices such as special telephones for the hearing impaired and Braille books for the vision impaired (guide dog expenses may also be deductible)
Weight loss and smoking cessation programs with a credentialed provider
Note that you can only deduct medical expenses you paid for in 2020. In other words, if you have a hefty hospital bill from December 2020 but you didn’t pay it until January 2021, you can’t deduct it on your 2020 return. For purposes of the medical expenses deduction, it’s the date you pay them, not the date you incur them.
Don’t forget transportation expenses. In 2020, you can claim $0.17 per mile for health-related trips. You can also deduct parking costs. If you take a taxi, rideshare service, or public transportation, those costs are also deductible if you meet the health deduction threshold. You can read more about the 2020 mileage deduction on the IRS website.
You can’t deduct Medicare taxes taken from your paycheck or insurance premiums for life, disability, or auto insurance, even if it includes a medical benefit. You also can’t deduct any expenses paid with pre-tax dollars from an FSA or HSA.
Other non-deductible medical expenses include:
Vitamins and other health supplements
Gym memberships, even if you join a gym on your doctor’s recommendation
It’s always important to keep good records when you’re dealing with the IRS, but it’s especially important to have your paperwork in order if you’re claiming the medical expense deduction. That’s because there are two parts to proving a qualified expense.
First, you need the itemized bill from the healthcare provider showing the service was for you, your spouse, or a covered dependent. This proves that the expense is deductible. Second, you need proof that you—not a third party—actually paid the bill in question. The IRS generally accepts canceled checks, bank statements, credit card statements, and signed and dated receipts.
Your chances of getting audited this year are pretty slim. The IRS is struggling to process millions of stimulus checks in its pared-down COVID state, but they will eventually return to normal staffing levels. If your return is flagged for a large medical expense deduction, you’ll need tandem records to prove your claim: proof the expense is tax-deductible and proof you paid it.
Some states set a lower threshold for the medical expense deduction. For example, New Jersey allows you to claim medical expenses in excess of just 2% of AGI. So even if you don’t qualify for the federal deduction, you may still be able to save money on your state income taxes.
Most people won’t be able to deduct their medical expenses. Between the itemization requirement and the 7.5% AGI rule, you must have fairly significant medical bills to qualify.
On the other hand, if you or a family member has a serious or chronic health condition, the medical expense deduction can save you thousands of dollars on your taxes each year.
Since it’s difficult to know in January what you’ll spend on medical bills for the coming year, it’s always a good idea to save bills and receipts for every medical expense that qualifies. There are several easy tools to help you digitize and track your records. If you find mid-year that you’re on track to claim the deduction, you’ll have all your documentation lined up and ready to go when it’s time to file your taxes.
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