If you’re wondering if health care costs are tax deductible, the answer is mostly “yes” but also, “it depends.”
First, to understand what a health care deduction is, there are a few things we’ll get out of the way. We assume you know what taxes are and when they’re due (they’re due at different times for different people!) But do you know what a tax deductible health care cost is? Before you can deduct health care costs from your taxes, let’s go over a few terms.
Health Care Debt in America
Americans pay a lot of money for health care. Here are a few facts about health care debt:
- Nearly 20% of households in the U.S. can’t afford medical care. And almost a quarter of households with minors are more likely to carry medical debt than those without, according to the Census. These numbers were published in 2021. They represent data from 2017, but medical debt got even worse as the years went on, especially once the pandemic hit.
- Half of Americans carry medical debt. Nearly 60 percent of those owe no less than $1,000, according to an article published by Forbes.com.
- The number-one source of debt collections for Americans is medical debt, according to research published in JAMA.
Most readers fall into one of three buckets:
- You’re an ordinary American who struggles to pay for health care and are desperate to understand health insurance.
- You work in human resources and help people pick a health insurance plan.
- You’re employed in the health insurance consulting industry and help your clients find health plans they can afford.
Regardless of the category you’re in, you’ll find Decoding Health Insurance to be an incredibly comprehensive, easy-to-read book. It’s guaranteed to help both businesses and individuals untangle the messy healthcare system that drives us all crazy.
Important Terms about Health Care Expenses
Since the best way to get out of debt is to pay your bills and/or don’t accrue debt, finding out if health care costs are tax deductible is a great mission. “About 44% of Americans who owe money for medical bills don’t know they can deduct medical expenses from their taxes,” according to LendingTree. By deducting some of your and your family’s medical costs, you can save a lot of money in taxes.
So, before we answer what should be a pretty straightforward question: Are health care costs tax deductible?”, here’s some more important information you should know.
A medical expense is the cost of a doctor appointment, including a specialist; they’re your prescriptions and physical therapy. When covered by your insurance, it is a medical expense. But there are a lot of medical expenses that are not covered by certain types of insurance. And, no, we’re not talking about copays that don’t yet meet your deductible.
Some medical expenses are simply not covered by insurance at all. Or they may be covered by private health insurance plans, which are paid for out-of-pocket by your employer or yourself. But those plans are much more expensive than the ones available via the ACA Marketplace. If you do happen to have personal health insurance, you’re also less likely to have medical debt. However, you likely still have tax deductible health care costs.
There are many procedures, treatments and equipment that simply are not covered by an ordinary insurance plan you get at work or pay for yourself. For example, in Texas, adult vision care and dental health care are not covered by primary health insurance plans, including those available through the Affordable Care Act (aka, Obamacare or ACA Health Insurance Marketplace).
Here is a partial list of medical costs that, by law, must be covered by health insurance:
- Disease or disorder diagnoses
- Preventative treatments and appointments
- Disease and illness mitigation (reduce severity or seriousness)
- Medical equipment, supplies, and diagnostic services ordered or prescribed by your medical provider
The expenses listed here should be seen as medical categories (in terms of your taxes) and are tax deductible—but not 100%. So that’s another part of the Decoding Health Insurance maze that most Americans get to tangle with once or more a year.
Medical Expense Deduction
If you have a medical expense that is not covered by your health insurance plan, you may be able to deduct that expense from your taxes.
The amount can change annually, and what is deductible—as in which services or products—can also change. For example, for the 2021 tax year, the IRS made Covid home test kits and personal protective equipment (PPE) deductible. These items include hand sanitizer, wipes, and masks, and were not tax deductible in 2020. Additionally, no one knows at this moment if they will continue to be deductible in the following tax years.
Adjusted Gross Income
Adjusted Gross Income (AGI) is your total income minus adjustments such as retirement account contributions or student loan interest. These adjustments lower the amount you owe. So when your paycheck says you earned $500, that’s your gross income. Your AGI is the number you see before Uncle Sam takes his cut.
According to H&R Block, “AGI is the starting point for calculating your taxes and determining your eligibility for certain tax credits and deductions that you can use to help you lower your overall tax bill.”
Gross income — not to be confused with AGI — includes monies received from all sources. This includes rent collected as income on a property you own and the interest you get on your savings accounts. It also includes payouts you receive from some retirement accounts, even alimony, and other benefits from your financial portfolio.
Unreimbursed Medical Expenses
When you file your tax returns in 2022, you should include deductions for qualified medical expenses that were not covered by insurance. Officially, they’re known as unreimbursed medical expenses.
One of the last things a taxpayer does on their tax returns is estimate how much money they owe (or get back!) from the government. So the only way to determine what portion of your health care costs are deductible, you or your accountant first need to determine your AGI.
Medical Expenses that are Tax Deductible
There’s a very long list of medical expenses you can deduct from your taxes. Fortunately, there’s an easy way to find out what’s on the list. Just go to IRS Publication 502 (we can’t recommend enough bookmarking this link as you prepare your tax return this year.)
And remember, if you pay for one or more of these expenses without a full or partial contribution (or a discount) from your health insurance, it does not necessarily mean it was an unreimbursed expense. Oftentimes, it can mean you were required to hit a specific copay before your health insurance kicked in their portion of the cost.
Deductible Medical Expenses
This partial list is from IRS Publication 502:
- Drug and alcohol addiction treatment
- Transportation to a hospital by ambulance
- Artificial teeth
- Birth control pills and devices
- Diagnostic body scans
- Books and literature written in Braille
- Post-pregnancy breast pumps
- Non-cosmetic breast reduction surgery (as in the case for cancer treatment)
- Contact lenses
- Eyeglasses, eye surgery and contact lenses
- Guide dog and service animals
- Home care services
Non-deductible Medical Expenses
Medical expenses are deemed deductible when the service, medication, or device is necessary for alleviating or preventing physical and mental illnesses. Unfortunately, the government has a long list of devices, services, and supplements that are not considered necessary for general health. These are therefore not deductible.
These include examples such as:
- Spas and gym memberships
- Devices like heating pads and ice packs
So let’s get back to the original question: Are health care costs tax deductible? The answer is—some of them! Here is the formula for determining which portions of your medical bills you can and cannot deduct.
Formula for Deducting Healthcare Costs from Your Taxes
Before you start plugging numbers into a spreadsheet, remember what we said earlier: For returns filed in 2022, you can deduct qualified medical expenses. The catch is that the amount must be more than 7.5% of your AGI and you must use IRS Schedule A to itemize your deductions. If you itemize, you cannot take the standard deduction.
For example, suppose your family’s AGI is $75,000. That means that any deductible funds you spent on medical expenses, starting after $5,625, can be deducted. How did we come up with $5,625? When you have an AGI of $75,000, 7.5% comes out to $5,625.
When it’s determined how much money you owe to the IRS, you write the deductible amount on the deduction line.
There are lots of places online to find out how to fill out your tax return forms, or you can hire an accountant. You can also use a popular app like TurboTax, or go to a business like H&R Block and work directly with a tax preparer who will get into the nitty-gritty with you. Just be sure you save all of your receipts. No, really, save all of your medical-expense receipts. Your tax-preparer—even if it’s you—will need them.
This is not to be taken as tax advice. Please consult an accountant, tax lawyer, or the IRS for issues, questions, and details. You can find more info and tips on health coverage topics in our book Decoding Health Insurance and the Alternatives: Options, Issues, and Tips for Saving Money.