Mar 17th 2011
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Do you have clients who need a clear explanation of how the medical deduction works? This article from the National Association of Enrolled Agents explains it all.
How do you know whether or not your medical and dental expenses can be deducted from your 2010 taxes? There are many considerations, and then it boils down to a simple formula: Compute your adjusted gross income and multiply that by 7.5%. Subtract this amount from your medical expenses, and what’s left is what is deductible.
Start this process by figuring out which of this year’s medical and dental expenses will qualify as deductions in Uncle Sam’s eyes. After reducing the expense by the amount paid by insurance, you can claim expenses incurred for diagnosis, cure, treatment and prevention of disease or for purposes affecting the function and structure of the body. Commonly overlooked expenses include: wheel chairs, glasses, dentures, bandages, fertility enhancement, pregnancy test kits, birth control pills, health insurance premiums including Medicare Parts B & D and certain type of long-term care insurance policies, stop smoking programs (if recommended by a doctor) and weight loss programs prescribed by a doctor to treat disease such as obesity or hypertension.
Keep in mind that the costs of medical service must be claimed in the year paid, not necessarily the year received. If you are paying with a credit card, IRS considers the medical treatment paid for, regardless of how long it takes you to pay it off. Before you run up those credit cards, however, the tax advantages should be weighed against the cost of the interest.
Here’s the catch: you must have enough other itemizations (i.e., home mortgage interest, real estate taxes, charitable contributions, etc.) to beat the standard deduction. Therefore, you may technically have enough medical expenses, but if you don’t have enough “itemizations” on Schedule A to beat the standard deduction, you won’t benefit by deducting the expenses. The standard deduction for married couples filing a joint return is $11,400 for 2010; for single individuals and married couples filing separate returns, it’s $5,700 for 2010; and for heads of household, the standard deduction for 2010 is $8,400.
“After 20 years of preparing returns, what I have found is that most people who have high enough medical expenses to qualify are elderly,” said Allen L. Beatty, an enrolled agent with Apple Tax Services in Jackson, OH. “Generally, elderly people who own a home have paid it off in full for years and the largest item I usually find in itemized deductions is the home mortgage interest. This problem is compounded even more because once you are 65 you are entitled to an extra standard deduction of $1,400. My experience has been that medical deductions can seldom be claimed.”
Even if you don’t qualify for the Schedule A deduction, some states have different thresholds and you may find you can use some of these expenses on your state income tax return. Hiring a federally-licensed tax practitioner to prepare your return will help ensure you take advantage of all the deductions and credits you are entitled to this tax season.
Reprinted from the National Association of Enrolled Agents
About Enrolled Agents
Enrolled agents (EAs) are tax specialists licensed by the US Department of the Treasury. To earn the EA license, candidates must pass a background check and a stringent three-part exam on tax. To maintain the license, they must complete annual continuing education that is reported to the IRS. Members of the National Association of Enrolled Agents (NAEA) are obligated to complete additional continuing education and adhere to a code of ethics and rules of professional conduct. The find an enrolled agent – the only federally licensed tax practitioner – in your area, go to the “Find an Enrolled Agent” directory at www.naea.org.