One of the tax-saving benefits the IRS offers taxpayers is the deduction for medical expenses you pay during the year. However, the federal government doesn't allow you to deduct 100 percent of your medical costs, nor is the deduction available to taxpayers who choose the standard deduction. And if you receive any help paying for your medical bills, such as from an insurance company or employer, these amounts are not eligible for the deduction.
The key requirement to claiming a deduction for your medical expenses is that you choose to itemize your deductions rather than claim the standard deduction. Generally, it's beneficial to itemize when your total deductible expenses exceed the standard deduction for your filing status. In 2011, for example, a single filer is eligible for a standard deduction of $5,800. If you are a single filer, this means the total of your medical expenses plus all other expenses eligible to be itemized exceed this amount. If it doesn't, then no tax savings are available for your medical expenses.
Eligible Medical Expenses
When calculating your medical deduction for the year, you can include all amounts you pay for yourself, a spouse and all dependents. Most of the medical expenses you pay during the year, such as doctor visits, prescription medications, insurance premiums and hospital stays are eligible for the deduction. However, certain holistic treatments you pay for, such as massages, are not eligible for the deduction. Surprisingly, however, the IRS does allow you to deduct the cost of receiving acupuncture treatments.
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Medical Deduction Limitations
The IRS imposes one of the highest Adjusted Gross Income (AGI) limitations on the medical expense deduction. Essentially, you can only deduct the amount of your total that exceeds 7.5 percent of your AGI. This means that if your AGI is $100,000 and you incur $10,000 of medical expenses, you can only deduct $2,500 since 7.5 percent of your AGI is $7,500. You must also be aware that if you take a deduction in the current year, and receive a reimbursement for the expense in a future year, the IRS expects you to include the reimbursement in your taxable income. By doing this, you are effectively eliminating the deduction you claim in the prior year, which you are no longer eligible for.
Reporting Medical Expenses
Since you can only claim a medical expense deduction if you itemize, you must report your entire medical expenses on the Schedule A attachment to your tax return. When you fill the schedule out, you will see a specific section for you to report the medical expenses. In addition, your Schedule A will guide you through the calculation for determining the amount that exceeds the 7.5 percent AGI limitation.