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Actions Claiming Medical Expenses on Taxes: How to Maximize Tax Benefits from Medical Bills
Key takeaways
- You can deduct medical expenses on your federal tax return if they exceed 7.5% of your adjusted gross income.
- You must itemize your deductions to claim medical expenses.
- HSA and FSA accounts could also provide tax benefits.
The millions of households grappling with medical issues are all too aware of the cost of medical care in the United States. If your out-of-pocket costs amount to thousands of dollars every year, you might be able to find some financial relief when you file your taxes.
Here's how claiming medical expenses on taxes could help you cope with hefty bills.
Claiming medical expenses on taxes
It would be great to deduct all your medical bills, but you can only write off unreimbursed medical expenses that exceed 7.5% of your adjusted gross income. Let's say that your adjusted gross income (AGI) is $75,000 and that you paid $10,000 out-of-pocket for your medical bills. In this scenario, you can only deduct $4,375—the difference between the $10,000 in expenses and the $5,625 threshold.
You must itemize your deductions Opens in new window to deduct your medical expenses. You cannot take the standard deduction. The standard deduction for single filers in 2020 is $12,400. For someone filing as a single head of a household, the standard deduction is $18,650. For married couples filing jointly, it's $24,800. You only benefit from itemizing if your deductions exceed these amounts.
Here are examples of medical expenses you can deduct Opens in new window:
- Hospital stays
- Surgeries
- Acupuncture
- Drug and alcohol addiction treatment
- Prescription drugs
- Prescription eyeglasses
- Prescription contact lenses
- Dentures
- Hearing aids
If you have specific questions related to your costs, consult the IRS or a trusted tax professional.
Tax savings with an HSA or FSA
You might not have enough medical expenses to qualify for the medical expense tax deduction. But if you qualify for a Health Savings Account (HSA) or Flexible Spending Account (FSA), you might see similar tax benefits.
Contributions to an HSA are not taxed, and you don't pay taxes when you withdraw funds to pay for certain medical expenses. To use an HSA, you must have a qualifying high-deductible health plan. For 2020 and 2021, that means a deductible of at least $1,400 for individuals or $2,800 for a family. The maximum yearly out-of-pocket expense PDF opens in new windowis $7,000 for individuals or $14,000 for families.
If you don't qualify for an HSA, you could take advantage of an FSA if your employer offers one. An FSA lets you contribute pretax dollars to help pay for medical expenses. However, you usually lose what's left in your FSA if you don't use it by the end of the year. (You typically have until the middle of the following year to submit claims for the previous year. Consult your benefits department to determine the deadline that applies to you, as well as whether you can roll over some of your balance or get back unused funds for 2020 (or 2021) under a new federal rule.
Medical expenses and taxes during the COVID-19 pandemic
If you or someone in your family contracted COVID-19, hopefully your health insurance covered the majority of treatment. Unfortunately, there are no special IRS rules on medical expenses related to COVID-19. You can, however, use deductions or HSA or FSA contributions to reduce your taxable income.
The main coronavirus-related benefit from the IRS came via the stimulus payments issued to eligible taxpayers. Putting this extra cash aside in an HSA or FSA could be a wise move if you're worried about covering medical costs if you or a family member were to get sick.
The IRS has several resources dedicated to coronavirus tax help.
What you can do next
If your household runs up large medical bills, make a point of tracking those expenses so you can explore your potential tax savings. If you don't qualify for the medical expenses deduction, look into how you could save with an HSA or FSA. Speak with an experienced tax professional to identify tax-saving opportunities for your specific situation.
Footnotes
Eric Rosenberg is a full-time financial writer with an undergraduate degree and MBA in finance. He covers personal and business finance topics and has contributed to publications including Business Insider, The Balance, Investopedia and the Huffington Post.
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