Medical Expenses and Taxes: What You Need to Know

Some taxpayers may benefit from a recent IRS announcement that certain Covid-related expenses qualify as medical-expense deductions.

Medical-expense deductions, once on the congressional chopping block, are alive and well, including a recent newcomer stemming from the Covid-19 pandemic.

Here is what you need to know about claiming unreimbursed medical expenses on your tax returns, as well as a few easily overlooked deductions.

Eligibility

About 4.6 million federal income-tax returns claimed medical and dental expenses as an itemized deduction for 2018, says Eric Smith, an Internal Revenue Service spokesman. Tax-law changes several years ago made it more attractive for millions of taxpayers to choose the standard deduction, instead of itemizing deductions such as medical bills and charitable gifts on Form 1040’s Schedule A.

A big obstacle to deducting medical bills is what’s known as the 7.5% rule: If you itemize, you can deduct medical and dental expenses on Schedule A only to the extent that the total exceeds 7.5% of adjusted gross income.

For example, suppose your unreimbursed medical expenses for last year totaled $15,000, and your adjusted gross income was $200,000. You wouldn’t be allowed to deduct any of those medical bills because they didn’t go above 7.5% of your income. If your medical bills came to $20,000 and you itemized, you would be eligible to deduct only $5,000.

A new twist

While most people typically don’t meet the 7.5% test, some may benefit from a recent IRS announcement that certain Covid-related expenses qualify as medical-expense deductions.

The IRS said that amounts you paid to buy personal protective equipment for the primary purpose of preventing the spread of Covid-19 qualify as deductible medical expenses, says Jackie Perlman, principal tax research analyst at the Tax Institute at H&R Block. This includes such items as face masks, hand sanitizer and disinfecting wipes, Ms. Perlman says. But, again, you can’t deduct any of these costs unless your total medical expenses exceed 7.5% of adjusted gross income.

Easily overlooked expenses

Even some people who meet all the eligibility rules may overlook several valuable deductions. Mark Luscombe, principal federal tax analyst at Wolters Kluwer Tax & Accounting, advises to not forget about medical-related transportation expenses, including operating expenses and mileage for a car used for medical reasons.

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Among other items that may be overlooked are the unreimbursed costs for crutches, orthopedic shoes, and alcohol and drug abuse treatment programs, Mr. Luscombe says. You generally can include costs of a smoking-cessation program, but you can’t deduct such nonprescription items as nicotine gum or patches, he says.

What about weight-loss programs? Yes, under certain circumstances. You can include the amounts you pay to lose weight “if it is a treatment for a specific disease diagnosed by a physician (such as obesity, hypertension or heart disease),” the IRS says in Publication 502. That includes membership fees in “a weight reduction group as well as fees for attendance at periodic meetings.” Taxpayers can’t include membership fees in a gym, health club or spa, but they can include “separate fees charged there for weight-loss activities.” Be sure to get the doctor’s prescription in writing, Mr. Luscombe says.

Other deductible items include costs of a legal abortion, acupuncture, birth-control pills prescribed by a doctor, and the cost of a hearing aid and batteries, repairs and maintenance needed to operate it. See IRS Publication 502 for more details. (IRS Publication 969 has information on health savings accounts and other tax-favored health plans.)

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Lifetime-care advance payments

Many older adults (including my wife and I) have moved into a continuing-care retirement community, or a similar place, where you sign a contract covering both residential and medical services, such as independent living, assisted living and skilled nursing (long-term care). Depending on the details of the contract, a significant part of what you pay may be deductible.

Publication 502 summarizes the rules on deducting as a medical expense part of a “life-care fee” or a “founder’s fee” that you pay monthly or as a lump sum under the agreement with a retirement home. How much you can deduct depends on the amount allocated to medical care, says Ms. Perlman of H&R Block.

The IRS says the agreement must require you to pay “a specific fee as a condition for the home’s promise to provide lifetime care that includes medical care.” Our community, for instance, gives residents a statement from an actuarial firm that includes details on the continuing-care retirement community and deductible amounts.

“The IRS has no set percentages [on how much can be deducted], just looking for a reasonable allocation,” says Mr. Luscombe. What’s reasonable? The IRS says the statement from the home “must be based either on the home’s prior experience or on information from a comparable home.”

This and many other issues can be very deep water, so you should consider getting guidance from an experienced tax pro.

Some teachers and other educators might benefit from a recent development involving a longstanding “educator-expense” deduction.

Educators’ unreimbursed expenses paid or incurred after March 12, 2020 for protective items to stop the spread of Covid-19 in classrooms can qualify for the educator-expense deduction. That includes such items as face masks, disinfectants, hand soap, hand sanitizer, disposable gloves, air purifiers and physical barriers such as clear plexiglass.

The educator-expense deduction has allowed millions of educators who buy classroom supplies out of pocket, including books and computer equipment, to deduct as much as $250 a year on their tax returns, even if they don’t itemize their deductions ($500 for married couples filing jointly and where both spouses are eligible, but not more than $250 apiece). This applies to teachers in grades K-12, counselors, principals and aides who work for at least 900 hours during a school year. It doesn’t apply to college professors.

One caveat: The addition of the Covid-19-related expenses doesn’t change the dollar limits. Thus, “this won’t help anyone who has already reached or exceeded” the dollar limit, an IRS spokesman says.

PHOTO: MIKEL JASO

By Tom Herman - May 3, 2021 12:00 pm ET

Mr. Herman is a writer in California. He was formerly The Wall Street Journal’s Tax Report columnist. Send comments and tax questions to [email protected].