The IRS allows you to deduct medical expenses, but only if the amount is over 7.5% of your adjusted gross income. So for example if you make $100,000, then only the expenses in over $7,500 are deductible. Obamacare changes the threshold to 10% in 2013.
For most taxpayers this deduction is useless because of the 7.5% rule, but if you have sizeable medical expenses this can be a great money saver. The deduction is frequently used by seniors and by people who have big medical expenses in one year. Here are some of the things you can deduct:
- Health insurance premiums you pay for yourself, your spouse, your dependents. These include medicare premiums, which are often reported on the SSA-1099. Note that premiums paid through your W-2 or paycheck for you, your spouse, or your dependents (but not domestic partner) are already pretax so you cannot deduct these. And if you are self-employed then you may be able to deduct the premiums directly against your self-employment income, which is better as you don't have to deal with the 7.5% limit.
- Amounts paid out of pocket for medical, dental, and vision procedures, hospital stays, prescription medicines, prescription glasses, repairs, and contact lenses are all deductible. Over the counter medicines prescribed by a doctor for a specific condition are also deductible.
- Accupuncture, massages, non-traditional treatments for a specific condition are deductible.
- Medical commuting miles (23 cents a mile for 2012), tolls, and parking fees can be deducted.
- Hotel stays and certain meals can be deducted but only to a limit.
Also note that you can deduct medical expenses for your extended family, even if they are not declared as dependents on your tax return. The doctor, dentist, hospital, clinic may be in any country.
But if you paid for these items with a flexible spending account (FSA) or were reimbursed then they are not deductible.
General supplements and over-the-counter medicines for overall health and medical marijuana cannot be deducted. If you're running your own business, it may be better to deduct your health insurance premiums as a business expense as the 7.5% threshold does not apply.
The bad news is that your deduction may be subject to the alternative minimum tax. If this happens, the deduction is reduced (it must be over 10% of your income, or 12.5% after Obamacare takes effect). If you live in California, you're likely to be subject to alterntive minimum tax (AMT) if your income is over $225,000, but the AMT can strike at far lower or far higher income levels as well depending on your specific situation.
You can use the medical expenses spreadsheet to help you track your medical expenses.
Use the "Expenses" tab to track your expenses. Include expenses that you paid out-of-pocket with post-tax dollars, and for which you were not reimbursed by FSA or any other entity.
Use the "Miles" tab of the spreadsheet to track your medical miles. However, this can get tedious if you have a lot of repeating trips. In this case, you can use the "Miles Alt" tab of the spreadsheet to track your mileage by the trip description. In this method you use your odometer or google/yahoo maps to determine the roundtrip mileage for one trip, then multiply by the number of trips. You should also save gasoline and repair receipts for additional documentation, even if taking standard mileage.
If you have a device in your car to let you pass the toll gate quickly (such as FasTrak in the Bay Area), the monthly statement from that device is itself a receipt. Otherwise obtain a receipt at the toll gate. If you put money into a parking meter there is no receipt; but you should just note the amount in your records.
In case you are audited, it is important if you have good record keeping. It is important to save receipts. Save the actual receipt showing the procedure performed in addition to the credit card slip. This can get tedious, but the IRS requires it. Save the actual receipts along with credit card slips for all your expenses.
IRS Publication 502 (medical and dental expenses)
IRS Publication 552 (Recordkeeping for Individuals)