Taxpayers swamped by big medical bills in 2011 can get some relief when they file their income tax forms this spring thanks to an overlooked deduction that is hard to reach in a typical year.
The IRS lets people deduct medical and dental expenses that surpass a certain percentage of their adjusted gross income, which is the last number on the first page of Form 1040. Taking advantage of this break requires careful record keeping and a review of the 34-page IRS Publication 502.
Here’s how to get started thinking about the deduction.
— Who uses this break?
Deductions for medical expenses fall into a unique category compared to other tax breaks. They usually don’t occur every year like write offs for mortgages or property taxes. Taxpayers also don’t want to voluntarily raise them to ease their tax bill, like they would a charitable contribution.
“You can’t say … ‘I think I’ll get sicker this year and have higher medical expenses,'” said Jackie Perlman, a senior analyst with The Tax Institute at H&R Block. “It’s not something you voluntarily want to increase.”
People generally need a big medical expense to qualify. Taxpayers must spend 7.5 percent of their adjusted gross income just to reach the point where they can use this deduction. Then they need a decent expense total beyond that point for the deduction to have a meaningful impact.
For instance, someone with adjusted gross income of $50,000 would have to spend well over $3,750 in order to qualify for the deduction and use it.
This deduction is usually limited to people who itemize their returns and pay taxes. The 2011 standard deduction for single taxpayers or people married and filing separately is $5,800. Married couples filing jointly have a standard deduction of $11,600.
—What expenses would count toward this deduction?
Publication 502 lays out an alphabetized expense list, starting with abortions and acupuncture. Eligible expenses also include chiropractor visits, fertility treatments, guide dog fees, eyeglasses and insurance premiums if you don’t have coverage through your employer.
The expense has to be something the patient paid out of pocket, not the portion of a bill the insurer covered. It also cannot be something the patient paid for with money set aside before taxes in a flexible spending account. The government doesn’t want to give you a tax break twice.
You can’t count gym membership fees as an expense just because your doctor tells you to exercise more, but you may be able to count it if it’s part of a medically prescribed weight-loss program.
— What expenses are often overlooked?
Miles traveled and other incidental expenses related to medical care can be deducted. This includes the cost per mile that you drove and airline, train or bus fees for travel to medical care. It also can covers expenses for meals and lodging if you go out of town for care.
“It’s the incidental, out-of-pocket expenses that are often overlooked because they are hard to recreate after the fact,” said Mark Steber, chief tax officer of Jackson Hewitt Tax Service.
Patients who start traveling for medical care should also start tracking their out-of-pocket expenses, in case they wind up qualifying for the deduction.
In general, it makes good sense to track all medical expenses every year, just in case they start piling up and you want up qualifying for the deduction.
— How much of a difference can this deduction make?
It has less of an impact than a tax credit, which directly lowers tax bills dollar for dollar by the amount of the credit. Deductibles lower the income amount on which the tax is based.
The taxpayer’s benefit largely depends on income and medical bill size. Perlman offers a hypothetical example using a married couple with $100,000 in adjusted gross income in the 25 percent tax bracket. If they have $1,000 in deductible medical expenses after they reach 7.5 percent of their adjusted gross income, they will lower their taxes by $250.
If they have $2,000 they can claim, that will lower their taxes by $500.
A small percentage of taxpayers use this benefit every year. About 10 million returns listed medical and dental deductions in 2009, according to the most recent data available from the IRS. That amounted to only about 7 percent of total returns from that year.
The total may be relatively small, but it grew 70 percent compared to 1999, when about 5.9 million returns listed the deductions.
The deduction will become harder to reach starting with 2013, when taxpayers will have to hit 10 percent of their adjusted gross income to qualify.
On the web, IRS Publication 502: http://www.irs.gov/pub/irs-pdf/p502.pdf