Maximize Medical Expense Write Offs

Retirees and those near retirement often shortchange themselves when computing medical expense tax deductions. Few taxpayers deduct medical expenses because of tax code changes over the years, but the deductions aren’t eliminated. There’s a good chance that if you’re reading this you aren’t maximizing this tax break.

To deduct medical expenses, you have to itemize expenses on Schedule A of Form 1040. Those who take the standard deduction ($12,600 on a joint return in 2015) don’t qualify. There’s an additional limit. Those ages 65 and over add up their qualified medical expenses and deduct only the amount that exceeds 7.5% of adjusted gross income (the last line on the front page of Form 1040). Taxpayers under age 65 deduct only the amount exceeding 10% of AGI, and the 10% rule will apply to those 65 and older after 2016.

You can deduct qualified medical expenses incurred by you, your spouse, and any dependents. Only expenses not reimbursed by insurance or paid by someone else are deductible. In other words, you deduct only your out-of-pocket expenses.

Qualified medical expenses are broadly defined as any expense incurred to cure or mitigate a disease or to affect a condition of the body. Many people lose deductions, because they don’t realize how many expenses qualify for deductions.

Frequently overlooked are medical insurance premiums, including Medicare premiums for Part B, Part C, Part D, and supple-mental, or Medigap, plans, even when they are deducted from your Social Security benefits.

Long-term care insurance premiums also are deductible when they are for qualified policies, up to a limit determined by the IRS each year. Your insurer can tell you if the policy is tax-qualified. The deduction limits are in the tax return instructions and on the IRS web site at www.irs.gov.

You may deduct medical expenses paid on behalf of a relative who qualifies as your dependent. The relative doesn’t have to live with you, but you must provide over half of his or support. If you’re helping with the medical expenses of a parent, sibling, or child (including in-laws and step relatives), you might be able to deduct those expenses. Check IRS Publications 17 and 502 for details. They available free on the IRS web site at www.irs.gov.

Deductions for long-term care expenses, such as nursing home and assisted living care, depend on the reasons for residing in the facility and the care received.

When the primary reason for residing in a nursing home is one’s physical condition and the need for readily available medical care, the entire cost of the nursing home is deductible. But if medical care is not the primary reason for residing in the nursing home, such as when the resident needs primarily custodial care, only the specific costs attributable to medical or nursing care are deductible. Food, lodging, and other personal expenses are not deductible in that case. 

Deducting the cost of an assisted living facility is trickier, because assisted living primarily is a residential facility not a medical facility. Residents who can perform at least five of the six activities of daily living (eating, toileting, transferring, bathing, dressing, and continence) deduct only the portion of the costs that are directly for nursing care or other medical care. But when the assisted living resident cannot perform two or more of the activities of daily living, the entire cost of the facility can be deducted if the resident has a plan of care in place. A plan of care can be drawn up by a physician, nurse, or physical therapist.

In one court case a patient was chronically ill due to dementia and her doctor believed caregivers were necessary around the clock for medical reasons as well as safety. Because the patient had a plan of care in place and her doctor believed the caregivers were necessary because of her diminished capacity, the Tax Court held that the payments to the caregivers were deductible as medical expenses. (Estate of Lillian Baral, 137 T.C. No. 1, 2011)

A long-term care provider usually itemizes bills so that you can see which expenses are for medical care and which aren’t.

Expenses for home care, including care provided by relatives, can be deductible when the care is medically necessary or due to medical conditions. When a relative provides the care, there must be a written agreement describing the care that will be provided and the compensation for it. The pay must be reasonable for the care provided, and the person paid must be qualified to give that level and type of care. Without a written agreement spelling out the details, the IRS will assume that a relative providing care is doing so without expectation of payment. (Estate of Olivo v. Commissioner, T.C. Memo. 2011-163)

Also deductible are dental and vision expenses that aren’t covered by insurance (including Medicare), as well as all co-payments or coinsurance, and deductibles.

Travel to receive medical care is deductible. You can deduct trips in your automobile to and from medical appointments using the standard mileage allowance, which is 23 cents per mile for 2015.

Almost any expense for something provided by a licensed medical provider that is non-cosmetic and to cure or mitigate a disease or affect a condition of the body is deductible. IRS publication 502 has the details.

Sometimes a person goes to adult day care. This is not medical care, but different tax breaks might be available when the person going to day care is the dependent of another taxpayer. When the taxpayer supporting the dependent is employed, a flexible spending account that reimburses dependent care might be available. The account allows an employee to allocate a portion of salary to the FSA, which then can be used to reimburse, tax free, qualified dependent care expenses. Check with your employer to see if this option is available and what the requirements are.

If an FSA isn’t available, a working taxpayer who is paying for the day care might be able to claim the dependent care tax credit. The expenses have to be necessary to allow the taxpayer (and a spouse if married) to work. The dependent’s gross income can’t exceed the personal exemption amount ($4,000 in 2015), and other conditions must be met. See IRS Publication 503 for more details. It’s available free at www.irs.gov.

RW February 2015.