It’s always wise to optimize the tax efficiency of medical benefits. But it’s even more crucial during a pandemic. Here’s how to keep your returns as healthy as possible.
The year 2020 may mean that more people have high medical expenses, with millions of Americans having tested positive for the coronavirus. On top of those stresses, many individuals are grappling with reduced income and preparing for their tax burden in April 2021.
It’s never been a better time to try to make the most of medical benefits to avoid overpaying. The IRS allows for certain deductions related to qualified medical expenses, including insurance premiums, in some cases. This article covers:
- Deductible medical expenses
- When you can deduct insurance premiums
- How to know whether to take the standard deduction or itemize your deductions
- Why you should work with a tax professional
Here’s a brief overview on making the most of medical benefits on your tax return.
What medical expenses are tax-deductible?
Medical expenses are only deductible when you pay out-of-pocket, including insurance premiums, in specific situations.
If you pay for a federal marketplace plan and don’t receive subsidies on your premiums, you can deduct the full payments on your federal return. If you receive subsidies, you can only write off the portion of the total you paid yourself.
However, premiums paid under an employer-sponsored health plan are not tax-deductible since the payments are already taken out from paychecks pre-tax. Health savings account and flexible spending account contributions, which are also paid pre-tax, are also not tax-deductible. These amounts are already exempt from federal taxes.
COBRA insurance, a plan that continues your employer-sponsored coverage after you leave a workplace, is paid entirely by the individual after-tax, so premiums are tax-deductible. Medicare premiums for Parts B, C, or D with Medigap are deductible. Part A isn’t if Social Security covers the premiums.
To deduct medical and dental expenses, you must itemize your deductions on your tax return. You can only count the total medical expenses that exceed 7.5% of your adjusted gross income (AGI), which was lowered from 10% at the end of 2019.
According to the IRS, deductible medical expenses include:
- Physician and nontraditional medical practitioner fees
- Inpatient hospital care or residential nursing home care costs
- Acupuncture or addiction treatment costs
- Prescription drug payments, including birth control
- Costs of transportation to medical care
- Dentures, eyeglasses, contacts, hearing aids, crutches, wheelchairs, and the like
- Therapy expenses
- Medical testing costs
- Costs of long-term care
- Other qualifying expenses
Items like burial costs, nonprescription drugs, toiletries, cosmetics, or cosmetic surgery are not deductible. Remember that you also can’t write off any bills that insurance covers—only out-of-pocket expenses.
Standard deduction or itemized deductions?
Now, you may be wondering whether you should take the standard deduction when filing your annual return or if your medical expenses make it smart to itemize instead.
The standard deduction for 2020 taxes is as follows:
- $12,400 for single filers
- $18,650 for heads of household
- $24,800 for married, filing jointly
If your deductible medical expenses are lower than these numbers, it benefits you more to take the standard deduction. But if you have higher costs than the standard deduction, itemize to save some money.
Taxpayers can use form Schedule A 1040 to calculate expenses. And keep in mind that your approach can change from year to year, so you can decide to itemize one year and take the standard deduction the next, depending on the medical expenses you incurred.
Get expert help with your taxes
Tax laws sometimes change, and new regulations could have significant impacts. For example, a range of tax benefits were instituted to ease the burden of individuals and businesses during the pandemic. It’s helpful to work with a professional to be sure you’re calculating and reporting everything correctly and that you’re taking advantage of every credit and deduction for which you qualify. If you still have questions about your medical benefits and qualifying expenses—or any business expenses—get help when you start running the numbers.
At Provident CPAs and Business Advisors, we offer tax and business services to help you minimize taxes and focus on your financial health. Whether you’re self-employed or are running a small- to mid-size business, we can step in to help you save now and plan for a successful future.
Get in touch with our team of experts to learn more about our services.