Photo by phalinn at Flickr.com
Updated for 2013
First things first, the vast majority of people won’t qualify for a medical expense deduction. You’ve got three big things in the way. The first is that your medical expenses have to be over 10% of your Adjusted Gross Income before you can start to claim them. (7.5% if you are 65 or over.) That means if you make $50,000 a year, your medical expenses have to be over $5,000 before any of it can be deducted. (Over $3,750 if you are 65 or over.) Second, even if your medical expenses are high enough to be deductible, you’ve got to have enough other deductible expenses to exceed the standard deduction to make claiming your medical expenses worthwhile. And third, for most people, their biggest medical expense is their health insurance—which, if you get it through work, it’s already been exempted from your income tax so you can’t use it on your Schedule A.
But even though you might not meet the criteria I mentioned above, you might still qualify for some type of medical expense deduction, so please bear with me a little longer.
Do you live in a state that has a medical deduction? Here in Missouri, there’s a deduction for health insurance. Many people don’t even know about the deduction so they don’t bother with it. Here’s the thing—if you list your health insurance, your prescriptions, and other medical expenses in the right boxes when you fill out your federal tax return—if you have a state deduction, it will flow through to your state tax return.
Why is it important to separate out your expenses and list them in the right boxes? Recently, I was reviewing a tax return prepared somewhere else. The taxpayer had several thousand dollars worth of medical expenses, including paying for his own health insurance. The preparer had totaled up all the expenses and put them all on the “other medical expenses” box. Now doing this made no difference on the taxpayer’s federal tax return. But when I separated out the man’s health insurance premiums, it saved him over $200 on his state tax return.
This was a Missouri tax return. Not all states have medical deductions. But if you don’t take shortcuts when you’re putting the numbers into your federal return, the numbers will flow to the proper spots on the state return.
Are you self employed? If yes, and you pay for your own health insurance, then you don’t have to claim it on the Schedule A—you can claim it on the front of your 1040 form on line 29. While this isn’t as good as being able to claim it as a business expense where you get to deduct it from self employment tax, placing a deduction on the front of the 1040 is still better than putting it on the Schedule A. The best part, you don’t even have to file a Schedule A in order to claim it.
But suppose you do have enough medical expenses to claim on your schedule A. You still want to put your self employed health insurance on line 29 first instead of on the Schedule for the best deduction. Let me explain with an example. This is going to have a lot of math but the math is just to prove my point. When you’re preparing your own tax return, all you have to remember is to put your deductions on the right line in the tax software–your software program will do the math for you.
A taxpayer aged 65 had medical expenses of about $10,000 of which $4,000 were for his self employed medical insurance. Let’s assume he had an AGI (adjusted gross income) of $50,000. If you lump all the medical expenses together, you take 50,000 and mulitply that by 7.5%–that becomes the floor amount; $3,750. All of the expenses over the $3,750 are deductible. $10,000 minuse the $3,750 equals $6,250. So if you’re in the 25% tax bracket, you’ve saved $1,563–sweet right?
But, if you took the $4,000 as your self employed medical insurance deduction first, that $4,000 would come off of your AGI. So your AGI would be $46,000. To compute the rest of your medical expense deduction you’d take 46,000 x .075 = $3450–that’s the new floor for claiming your medical expenses. But now, since you’ve used the 4000 someplace else, you have to take that out of the calculation so now your medical expenses on Schedule A are only 6000. With me so far? You take that 6,000 and subtract the 3,450 floor and you still have $2,550 in medical expenses on your Schedule A. So now, instead of writing off $6,250 you’re writing off $6,550 (the 2,550 plus the 4,000). Now your tax savings are $1,638–that’s $75 more than before. All you’ve done here is just move the number to the correct line.
$75 isn’t a lot of money, but wouldn’t you rather have that money in your pocket than give it to the IRS? I thought so.
Hi Jen,
Wow! Your timing is amazing. I’m actually working on an audit about medical expenses. The taxpayer told me a story that is pretty similar to yours–except he used Turbo Tax instead of H&R Block. But the bottom line was, he was working in the numbers and got sent to a different screen and thought everything was right.
But the big difference between you and him is that you can go back and fix your return before April 15th and you won’t deal with an audit!
It sounds to me like you need to use the standard deduction. So that’s the first part.
Now, about the tuition–it sounds to me like your employer paid more than $5250 towards your education. (That’s a limit that the IRS imposes on employer reimbursements for non-work related tuition reimbursements.) I’m guessing that since your employer pays over $5250–then your schooling is job related.
It’s fine for your employer to pay more. But I’m thinking you’re in the wrong input screen because you’re getting stuck.
Bottom line–you can’t claim a tax credit on tuition that your employer has paid for. So–if your tuition is $10,000 and your employer paid $8000–then you can only claim a credit for $2000. If your employer paid the whole thing–you get no tax credit.
I’m thinking that since you had so much trouble with the H&R Block program–why don’t you do into your local H&R Block office–with your Block tax return in had and have them help you do the amendment? I think you should get some help with this and I think they have some sort of discount or backup support option. It’s worth checking into.
Hi Lily,
So you don’t have enough in your medical deduction to itemize, but what about your other expenses? Did you pay any state income tax? I’m guessing that you don’t have a mortgage or real estate taxes? What about charitable donations?
Just because your medical deduction isn’t enough–don’t forget your other itemized deductions.
Hi! I need some advice please! I used H & R block computer in home services this year (which I will never do again), at any rate my refund was accepted by the IRS on the 14th. Today is 15 days out of the 21. I called today to check and the IRS says my file went through the error resolution department to check for errors and credits. I get the college credit so I assumed it was a mistake on that. When I opened up my H & R Block account to review my return I noticed my medical deduction was way to large. There were several different lines for me to put in my medical expenses, dentist, doctor, hospital, glasses, prescription, ect. While I was going through trying to make sure I had the right numbers on the right lines I put in $4,650 instead of $2,650, I also had other information in the other lines that I was editing and deleting so I thought, while I was hitting the buttons my computer froze so I hot my back arrow and it tossed to me a screen and I hit next and proceeded thinking my changes had saved. At the end of the return it checked for errors so I thought it was free of them. My medical shows as over $7,000 because the lines did not erase and I went over the standard deduction showing I had itemized! I am wondering if the IRS will send me a letter asking for proof of the expenses and if they do I will send receipts for the correct amount of $2,650 and explain the mistake. I have never had this happen so I am panicking and do not want to get in trouble. If they send a letter do I file and amendment at the same time and will they just fix the deduction and lower my refund? I will not owe in fact even after I went back on the site and removed my college credit and fixed my medical by deleting all the stupid lines and fixed my 4 to a 2, I still was receiving $1,400 back. Now if I add the college credit its higher. That’s my other concern, I was a full time college student last year and I had student loans I took out, I paid toward my tuition with my funds, my employer pays a good majority of my tuition but when I inserted the information about my employer it only let me put in $5250, not the full amount they pay. Am I still entitled to the education credit because I meet all the criteria? I appreciate all you feedback, I am losing sleep over this! I have never had mistakes on my taxes before. 🙁
As far as I can tell my AGI will be about 52K, my medical expenses are 7,706 so 52K x 7.5% is 3,900. If I subtract 3,900 from 7,706 = $3,806 it’s still less than the 5,950 standard deduction… so that means I shouldn’t deduct medical or am I doing something wrong? It drives me insane that every year the medical costs skyrocket and still I can never deduct them. Please let me know if I’m doing something wrong. Thanks